ALSOBY

DonTapscott

ParadigmShift:TheNewPromiseofInformationTechnology(1993)

Coauthor,ArtCastonTheDigitalEconomy:PromiseandPerilintheAgeof

NetworkedIntelligence(1995)GrowingUpDigital:TheRiseoftheNet

Generation(1997)

WhoKnows:SafeguardingYourPrivacyinaNetworkedWorld(1997)

Coauthor,AnnCavoukianDigitalCapital:HarnessingthePowerofBusiness

Webs(2000)

Coauthors,DavidTicollandAlexLowyTheNakedCorporation:HowtheAge

ofTransparencyWillRevolutionizeBusiness(2003)

Coauthor,DavidTicollWikinomics:HowMassCollaborationChanges

Everything(2006)

Coauthor,AnthonyD.WilliamsGrownUpDigital:HowtheNetGenerationIs

ChangingtheWorld(2008)Macrowikinomics:NewSolutionsforaConnected

Planet(2010)

Coauthor,AnthonyD.Williams

AnimprintofPenguinRandomHouseLLC

375HudsonStreet

NewYork,NewYork10014

creativity,encouragesdiversevoices,promotesfreespeech,andcreatesavibrantculture.Thankyou

forbuyinganauthorizededitionofthisbookandforcomplyingwithcopyrightlawsbynot

reproducing,scanning,ordistributinganypartofitinanyformwithoutpermission.Youare

supportingwritersandallowingPenguintocontinuetopublishbooksforeveryreader.

ISBN:9781101980132

InternationaleditionISBN:9780399564062

ISBN:9781101980156(ebook)Whiletheauthorhasmadeeveryefforttoprovideaccurate

telephonenumbers,Internetaddresses,andothercontactinformationatthetimeofpublication,

neitherthepublishernortheauthorassumesanyresponsibilityforerrorsorforchangesthatoccur

afterpublication.Further,thepublisherdoesnothaveanycontroloveranddoesnotassumeany

responsibilityforauthororthird-partyWebsitesortheircontent.

Version_1

ToAnaLopesandAmyWelsmanforenablingthisbook,andfor

understandingthat“it’sallabouttheblockchain.”

“Amasterpiece.Gracefullydissectsthepotentialofblockchaintechnologytotakeontoday’smostpressing

globalchallenges.”

—HernandoDeSoto,EconomistandPresident,InstituteforLibertyandDemocracy,Peru

“TheblockchainistotrustastheInternetistoinformation.LiketheoriginalInternet,blockchainhas

potentialtotransformeverything.Readthisbookandyouwillunderstand.”

—JoichiIto,Director,MITMediaLab

“Inthisextraordinaryjourneytothefrontiersoffinance,theTapscottsshednewlightontheblockchain

phenomenonandmakeacompellingcaseforwhyweallneedtobetterunderstanditspowerandpotential.”

—DaveMcKay,PresidentandCEO,RoyalBankofCanada

“Deconstructsthepromiseandperiloftheblockchaininawaythatisatonceaccessibleanderudite.

BlockchainRevolutiongivesreadersaprivilegedsneakpeakatthefuture.”

—AlecRoss,author,TheIndustriesoftheFuture

“Ifevertherewasatopicfordemystification,blockchainisit.Together,theTapscottshaveachievedthis

comprehensivelyandindoingsohavecapturedtheexcitement,thepotential,andtheimportanceofthis

topictoeveryone.”

—BlytheMasters,CEO,DigitalAssetHoldings

“ThisisabookwiththepredictivequalityofOrwell’s1984andthevisionofElonMusk.Readitorbecome

extinct.”

—TimDraper,Founder,DraperAssociates,DFJ,andDraperUniversity

“Blockchainisaradicaltechnologicalwaveand,ashehasdonesooften,Tapscottisoutthere,nowwith

sonAlex,surfingatdawn.It’squitearide.”

—YochaiBenkler,BerkmanProfessorofEntrepreneurialLegalStudies,HarvardLawSchool

“Ifyouworkinbusinessorgovernment,youneedtounderstandtheblockchainrevolution.Noonehas

writtenamorethoroughlyresearchedorengagingbookonthistopicthanTapscottandTapscott.”

—ErikBrynjolfsson,ProfessoratMIT;coauthorofTheSecondMachineAge

“Anindispensableandup-to-the-minuteaccountofhowthetechnologyunderlyingbitcoincould—and

should—unleashthetruepotentialofadigitaleconomyfordistributedprosperity.”

—DouglasRushkoff,authorofPresentShockandThrowingRocksattheGoogleBus

“Technologicalchangethatusedtodevelopoveragenerationnowhitsusinarelativeblinkoftheeye,and

noonetellsthisstorybetterthantheTapscotts.”

—EricSpiegel,PresidentandCEO,SiemensUSA

“FewleaderspushustolookaroundcornersthewayDonTapscottdoes.WithBlockchainRevolutionhe

andhissonAlexteachus,challengeus,andshowusanentirelynewwaytothinkaboutthefuture.”

—BillMcDermott,CEO,SAPSE

“BlockchainRevolutionisabrilliantmixofhistory,technology,andsociologythatcoversallaspectsofthe

blockchainprotocol—aninventionthatintimemayproveasmomentousastheinventionofprinting.”

—JamesRickards,authorofCurrencyWarsandTheDeathofMoney

“BlockchainRevolutionservesasanatlastotheworldofdigitalmoney,masterfullyexplainingthecurrent

landscapewhilesimultaneouslyilluminatingapathforwardtowardamoreequitable,efficient,and

connectedglobalfinancialsystem.”

—JimBreyer,CEO,BreyerCapital

“BlockchainRevolutionistheindispensableanddefinitiveguidetothisworld-changingtechnology.”

—JerryBrito,ExecutiveDirector,CoinCenter

“Incredible.Reallyincredible.TheTapscotts’examinationoftheblockchainasamodelforinclusioninan

increasinglycentralizedworldisbothnuancedandextraordinary.”

—SteveLuczo,ChairmanandCEO,SeagateTechnology

“Makesapowerfulcaseforblockchain’sabilitytoincreasetransparencybutalsoensureprivacy.Inthe

authors’words,‘TheInternetofThingsneedsaLedgerofThings.’”

—ChandraChandrasekaran,CEOandManagingDirector,TataConsultancyServices

“Theepicenteroftrustisabouttodiffuse!Thedefinitivenarrativeontherevolutionarypossibilitiesofa

decentralizedtrustsystem.”

—FrankD’Souza,CEO,Cognizant

“Identifiesaprofoundnewtechnologymovementandconnectsittothedeepestofhumanneeds:trust.

Thoroughlyresearchedandprovocativelywritten.Everyseriousbusinesspersonandpolicymakerneedsto

readBlockchainRevolution.”

—BrianFetherstonhaugh,ChairmanandCEO,OgilvyOneWorldwide

“BlockchainRevolutionsetsthetableforawaveoftechnologicaladvancementthatisonlyjustbeginning.”

—FrankBrown,ManagingDirectorandChiefOperatingOffice,GeneralAtlantic

“Amustread.You’llgainadeepunderstandingofwhytheblockchainisquicklybecomingoneofthemost

importantemergingtechnologiessincetheInternet.”

—BrianForde,DirectorofDigitalCurrencyInitiative,MITMediaLab

“Blockchaintechnologyhasthepotentialtorevolutionizeindustry,finance,andgovernment—amustread

foranyoneinterestedinthefutureofmoneyandhumanity.”

—PerianneBoring,FounderandPresident,ChamberofDigitalCommerce

“Whengenerationaltechnologychangestheworldinwhichwelive,wearetrulyfortunatetohave

cartographerslikeDonTapscott,andnowhissonAlex,toexplainwherewe’regoing.”

—RayLane,ManagingPartner,GreatPointVentures;PartnerEmeritus,KleinerPerkins

“DonandAlexhavewrittenthedefinitiveguidebookforthosetryingtonavigatethisnewandpromising

frontier.”

—BenjaminLawsky,FormerSuperintendentofFinancialServices,StateofNewYork;CEOof

TheLawskyGroup

“BlockchainRevolutionisanilluminating,criticallyimportantmanifestoforthenextdigitalage.”

—DanPontefract,authorofThePurposeEffect;ChiefEnvisioner,TELUS

“Themostwell-researched,thorough,andinsightfulbookonthemostexcitingnewtechnologysincethe

Internet.Aworkofexceptionalclarityandastonishinglybroadanddeepinsight.”

—AndreasAntonopoulos,authorofMasteringBitcoin

“BlockchainRevolutionbeautifullycapturesandilluminatesthebravenewworldofdecentralized,trustless

money.”

—TylerWinklevoss,Cofounder,GeminiandWinklevossCapital

“Afascinating—andreassuring—insightintoatechnologywiththepowertoremaketheglobaleconomy.

Whataprize.Whatabook!”

—PaulPolman,CEO,Unilever

CONTENTS
AlsobyDonTapscott
TitlePage
Copyright
Dedication
PraiseforDonTapscottandAlexTapscott
Acknowledgments
PARTI:SayYouWantaRevolution
CHAPTER1:TheTrustProtocol
InSearchoftheTrustProtocol
HowThisWorldwideLedgerWorks
ARationalExuberancefortheBlockchain
AchievingTrustintheDigitalAge
ReturnoftheInternet
YourPersonalAvatarandtheBlackBoxofIdentity
APlanforProsperity
PromiseandPeriloftheNewPlatform
CHAPTER2:BootstrappingtheFuture:SevenDesignPrinciplesofthe
BlockchainEconomy
TheSevenDesignPrinciples
1.NetworkedIntegrity
2.DistributedPower
3.ValueasIncentive

4.Security
5.Privacy
6.RightsPreserved
7.Inclusion
DesigningtheFuture
PARTII:Transformations
CHAPTER3:ReinventingFinancialServices
ANewLookfortheWorld’sSecond-OldestProfession
TheGoldenEight:HowtheFinancialServicesSectorWillChange
FromStockExchangestoBlockExchanges
Dr.Faust’sBlockchainBargain
TheBankApp:WhoWillWininRetailBanking
GoogleTranslateforBusiness:NewFrameworksforAccountingand
CorporateGovernance
Reputation:YouAreYourCreditScore
TheBlockchainIPO
TheMarketforPredictionMarkets
RoadMapfortheGoldenEight
CHAPTER4:Re-architectingtheFirm:TheCoreandtheEdges
BuildingConsenSys
ChangingtheBoundariesoftheFirm
DeterminingCorporateBoundaries
CHAPTER5:NewBusinessModels:MakingItRainonthe
Blockchain
bAirbnbVersusAirbnb
GlobalComputing:TheRiseofDistributedApplications
TheDAppKings:DistributedBusinessEntities
AutonomousAgents

DistributedAutonomousEnterprises
TheBigSeven:OpenNetworkedEnterpriseBusinessModels
HackingYourFuture:BusinessModelInnovation
CHAPTER6:TheLedgerofThings:AnimatingthePhysicalWorld
PowertothePeople
TheEvolutionofComputing:FromMainframestoSmartPills
TheInternetofThingsNeedsaLedgerofThings
TheTwelveDisruptions:AnimatingThings
TheEconomicPayoff
TheFuture:FromUbertoSUber
HackingYourFutureforaWorldofSmartThings
CHAPTER7:SolvingtheProsperityParadox:EconomicInclusionand
Entrepreneurship
APigIsNotaPiggyBank
TheNewProsperityParadox
RoadMaptoProsperity
Remittances:TheStoryofAnalieDomingo
BlockchainHumanitarianAid
SafeasHouses?TheRoadtoAssetOwnership
ImplementationChallengesandLeadershipOpportunities
CHAPTER8:RebuildingGovernmentandDemocracy
SomethingIsRottenintheState
High-PerformanceGovernmentServicesandOperations
EmpoweringPeopletoServeSelvesandOthers
TheSecondEraofDemocracy
BlockchainVoting
AlternativeModelsofPoliticsandJustice
EngagingCitizenstoSolveBigProblems
WieldingToolsofTwenty-first-CenturyDemocracy

CHAPTER9:FreeingCultureontheBlockchain:MusictoOurEars
FairTradeMusic:FromStreamingMusictoMeteringRights
ArtleryforArtLovers:ConnectingArtistsandPatrons
Privacy,FreeSpeech,andFreePressontheBlockchain
GettingtheWordOut:TheCriticalRoleofEducation
CultureontheBlockchainandYou
PARTIII:PromiseandPeril
CHAPTER10:OvercomingShowstoppers:TenImplementation
Challenges
1.TheTechnologyIsNotReadyforPrimeTime
2.TheEnergyConsumedIsUnsustainable
3.GovernmentsWillStifleorTwistIt
4.PowerfulIncumbentsoftheOldParadigmWillUsurpIt
5.TheIncentivesAreInadequateforDistributedMassCollaboration
6.TheBlockchainIsaJobKiller
7.GoverningtheProtocolsIsLikeHerdingCats
8.DistributedAutonomousAgentsWillFormSkynet
9.BigBrotherIs(Still)WatchingYou
10.CriminalsWillUseIt
ReasonsBlockchainWillFailorImplementationChallenges?
CHAPTER11:LeadershipfortheNextEra
WhoWillLeadaRevolution?
TheBlockchainEcosystem:YouCan’tTellthePlayersWithoutaRoster
ACautionaryTaleofBlockchainRegulation
TheSenatorWhoWouldChangetheWorld
CentralBanksinaDecentralizedEconomy
RegulationVersusGovernance
ANewFrameworkforBlockchainGovernance

ANewAgendafortheNextDigitalAge

TheTrustProtocolandYou

Notes

Index

ACKNOWLEDGMENTS

Thisbookcamefromthemeetingoftwomindsandtwolifetrajectories.Don

hadbeenleadinga$4millionsyndicatedresearchprogramcalledGlobal

SolutionNetworks(GSN)attheRotmanSchoolofManagement,Universityof

Toronto.Theinitiativewasinvestigatingnew,networkedmodelsofglobal

problemsolvingandgovernance.HeresearchedhowtheInternetwasgoverned

byamultistakeholderecosystemandbecameinterestedindigitalcurrenciesand

theirgovernance.Meanwhile,Alexwasanexecutivewiththeinvestmentbank

CanaccordGenuity.Henoticedthegrowingenthusiasmforearly-stagebitcoin

andblockchaincompaniesin2013andbeganleadinghisfirm’seffortsinthe

space.Duringafather-sonskitriptoMont-Tremblantinearly2014,we

brainstormedoverdinneraboutcollaboratingonthistopic,andAlexagreedto

leadaresearchprojectonthegovernanceofdigitalcurrencies,culminatingin

hiswhitepaper,titledABitcoinGovernanceNetwork.Themorewedugintothe

issues,themoreweconcludedthatthiscouldbethenextbigthing.

Meanwhileouragent,WesNeffattheLeighBureau,alongwithDon’s

publisherAdrianZackheimatPortfolio/Penguin(Wikinomics,

Macrowikinomics),wasencouragingDontoformulateanewbookconcept.

WhenAlex’spaperbecamewidelyrecognizedasleadingthinkinginthisarea,

DonapproachedAlextobehiscoauthor.Adrian,tohiscredit,madeusanoffer

wecouldn’trefuseandthebookneverwenttoauction,asisnormallythecase.

Wethenmadewhatinhindsightwasasmartdecision.Weapproachedthe

bestbookeditorweknew,KirstenSandberg,formerlyofHarvardBusiness

SchoolPress,andaskedhertoeditourbookproposal.Shedidaspectacularjob

andourcollaborationwassoeffortlessthatweaskedhertobeafull-time

memberofthebookresearchteam.Kirstenparticipatedwithusinmorethanone

hundredinterviewsandcollaboratedinrealtimeaswetriedtounderstandthe

myriadissuesonthetableanddevelophelpfulformulationstoexplainthis

extraordinarysetofdevelopmentstoanontechnicalaudience.Shehelpedus

bringthestorytolife.Inthatsense,shewasourcoauthorandthisbookwould

nothaveappeared,atleastinitscurrentcomprehensibleform,withouther.For

that,andforallthestimulationandlaughlines,weareverygrateful.

Ourheartfeltthankstothepeoplebelowwhogenerouslysharedtheirtime

andinsightswithusandwithoutwhomthisbookwouldnotbepossible.In

alphabeticalorder:JeremyAllaire,Founder,Chairman,andCEO,CircleMarc

Andreessen,Cofounder,AndreessenHorowitzGavinAndresen,ChiefScientist,

BitcoinFoundationDinoAngaritis,CEO,Smartwallet

AndreasAntonopoulos,Author,MasteringBitcoin

FedericoAst,CrowdJury

SusanAthey,EconomicsofTechnologyProfessor,StanfordGraduateSchoolof

BusinessAdamBack,CofounderandPresident,BlockstreamBillBarhydt,

CEO,Abra

ChristopherBavitz,ManagingDirector,CyberlawClinic,HarvardLawSchool

GeoffBeattie,Chairman,RelayVentures

SteveBeauregard,CEOandFounder,GoCoin

MarianoBelinky,ManagingPartner,SantanderInnoVenturesYochaiBenkler,

BerkmanProfessorofEntrepreneurialStudies,HarvardLawSchoolJake

Benson,CEOandFounder,LibraTax

TimBerners-Lee,Inventor,WorldWideWeb

DougBlack,Senator,CanadianSenate,GovernmentofCanadaPerrianeBoring,

FounderandPresident,ChamberofDigitalCommerceDavidBray,2015

EisenhowerFellowandHarvardVisitingExecutiveinResidenceJerry

Brito,ExecutiveDirector,CoinCenter

PaulBrody,AmericasStrategyLeader,TechnologyGroup,EY(formerlyIoTat

IBM)RichardG.Brown,CTO,R3CEV(formerExecutiveArchitectfor

IndustryInnovationandBusinessDevelopment,IBM)VitalikButerin,

Founder,Ethereum

PatrickByrne,CEO,Overstock

BruceCahan,VisitingScholar,StanfordEngineering;StanfordSustainable

BankingInitiativeJamesCarlyle,ChiefEngineer,MD,R3CEV

NicolasCary,Cofounder,BlockchainLtd.

ToniLaneCasserly,CEO,CoinTelegraph

ChristianCatalini,AssistantProfessor,MITSloanSchoolofManagementAnn

Cavoukian,ExecutiveDirector,PrivacyandBigDataInstitute,Ryerson

UniversityVintCerf,Co-creatoroftheInternetandChiefInternet

Evangelist,GoogleBenChan,SeniorSoftwareEngineer,BitGo

RobinChase,CofounderandFormerCEO,ZipcarFadiChehadi,CEO,ICANN

ConstanceChoi,Principal,SevenAdvisory

JohnH.Clippinger,CEO,ID3,ResearchScientist,MITMediaLabBram

Cohen,Creator,BitTorrent

AmyCortese,Journalist,Founder,Locavest

J-FCourville,ChiefOperatingOfficer,RBCWealthManagementPatrick

Deegan,CTO,PersonalBlackBox

PrimaveraDeFilippi,PermanentResearcher,CNRSandFacultyAssociateatthe

BerkmanCenterforInternetandSocietyatHarvardLawSchoolHernando

deSoto,President,InstituteforLibertyandDemocracyPeronetDespeignes,

SpecialOps,Augur

JacobDienelt,BlockchainArchitectandCFO,itBitandFactomJoelDietz,

SwarmCorp

HelenDisney,(formerly)BitcoinFoundation

AdamDraper,CEOandFounder,BoostVC

TimothyCookDraper,VentureCapitalist;Founder,DraperFisherJurvetson

AndrewDudley,FounderandCEO,EarthObservationJoshuaFairfield,

ProfessorofLaw,WashingtonandLeeUniversityGrantFondo,Partner,

SecuritiesLitigationandWhiteCollarDefenseGroup,PrivacyandData

SecurityPractice,GoodwinProcterLLP

BrianForde,FormerSeniorAdviser,TheWhiteHouse;Director,Digital

Currency,MITMediaLabMikeGault,CEO,Guardtime

GeorgeGilder,FounderandPartner,GilderTechnologyFundGeoffGordon,

CEO,Vogogo

VinayGupta,ReleaseCoordinator,Ethereum

JamesHazard,Founder,CommonAccord

ImogenHeap,Grammy-WinningMusicianandSongwriterMikeHearn,Former

GoogleEngineer,Vinumeris/LighthouseAustinHill,CofounderandChief

Instigator,BlockstreamToomasHendrikIlves,PresidentofEstonia

JoichiIto,Director,MITMediaLab

EricJennings,CofounderandCEO,Filament

IzabellaKaminska,FinancialReporter,FinancialTimes

PaulKemp-Robertson,CofounderandEditorialDirector,Contagious

CommunicationsAndrewKeys,ConsensusSystems

JoyceKim,ExecutiveDirector,StellarDevelopmentFoundationPeterKirby,

CEOandCofounder,Factom

JoeyKrug,CoreDeveloper,Augur

HalukKulin,CEO,PersonalBlackBox

ChrisLarsen,CEO,RippleLabs

BenjaminLawsky,FormerSuperintendentofFinancialServicesfortheStateof

NewYork;CEO,TheLawskyGroupCharlieLee,Creator,CTO;Former

EngineeringManager,LitecoinMatthewLeibowitz,Partner,PlazaVentures

VinnyLingham,CEO,Gyft

JuanLlanos,EVPofStrategicPartnershipsandChiefTransparencyOfficer,

Bitreserve.orgJosephLubin,CEO,ConsensusSystems

AdamLudwin,Founder,Chain.com

ChristianLundkvist,Balanc3

DavidMcKay,PresidentandChiefExecutiveOfficer,RBC

JannaMcManus,GlobalPRDirector,BitFury

MickeyMcManus,MayaInstitute

JesseMcWaters,FinancialInnovationSpecialist,WorldEconomicForumBlythe

Masters,CEO,DigitalAssetHoldings

AlistairMitchell,ManagingPartner,GenerationVenturesCarlosMoreira,

Founder,Chairman,andCEO,WISeKeyTomMornini,Founderand

CustomerAdvocate,SubledgerEthanNadelmann,ExecutiveDirector,Drug

PolicyAllianceAdamNanjee,HeadofFintechCluster,MaRS

DanielNeis,CEOandCofounder,KOINA

KellyOlson,NewBusinessInitiative,Intel

SteveOmohundro,President,Self-AwareSystemsJimOrlando,Managing

Director,OMERSVenturesLawrenceOrsini,CofounderandPrincipal,LO3

EnergyPaulPacifico,CEO,FeaturedArtistsCoalitionJosePagliery,Staff

Reporter,CNNMoney

StephenPair,CofounderandCEO,BitPayInc.

VikramPandit,FormerCEO,Citigroup;CoinbaseInvestor,PortlandSquare

CapitalJackPeterson,CoreDeveloper,Augur

EricPiscini,Principal,Banking/Technology,DeloitteConsultingKausik

Rajgopal,SiliconValleyOfficeLeader,McKinseyandCompanySuresh

Ramamurthi,ChairmanandCTO,CBWBankSunnyRay,CEO,

Unocoin.com

CaterinaRindi,CommunityManager,SwarmCorpEduardoRoblesElvira,

CTO,AgoraVoting

KeonneRodriguez,ProductLead,BlockchainLtd.

MatthewRoszak,FounderandCEO,TallyCapitalColinRule,Chairmanand

CEO,Modria.com

MarcoSantori,Counsel,PillsburyWinthropShawPittmanLLP

FrankSchuil,CEO,Safello

BarrySilbert,FounderandCEO,DigitalCurrencyGroupThomasSpaas,

Director,BelgiumBitcoinAssociationBalajiSrinivasan,CEO,21;Partner,

AndreessenHorowitzLynnSt.Amour,FormerPresident,TheInternet

SocietyBrettStapper,FounderandCEO,FalconGlobalCapitalLLC

ElizabethStark,VisitingFellow,YaleLawSchoolJuttaSteiner,

Ethereum/Provenance

MelanieSwan,Founder,InstituteforBlockchainStudiesNickSzabo,GWU

Law

AshleyTaylor,ConensysSystems

SimonTaylor,VPEntrepreneurialPartnerships,BarclaysDavidThomson,

Founder,Artlery

MichelleTinsley,Director,MobilityandPaymentSecurity,IntelPeterTodd,

ChiefNaysayer,CoinKite

JasonTyra,CoinDesk

ValeryVavilov,CEO,BitFury

AnnLouiseVehovec,SeniorVicePresident,StrategicProjects,RBCFinancial

GroupRogerVer,“TheBitcoinJesus,”MemorydealersKK

AkseliVirtanen,HedgeFundManager,RobinHoodAssetManagementErik

Voorhees,CEOandFounder,ShapeShift

JoeWeinberg,CofounderandCEO,Paycase

DerekWhite,ChiefDesignandDigitalOfficer,BarclaysBankTedWhitehead,

SeniorManagingDirector,ManulifeAssetManagementZookoWilcox-

O’Hearn,CEO,LeastAuthorityEnterprisesCarolynWilkins,SeniorDeputy

Governor,BankofCanadaRobertWilkins,CEO,myVBO

CameronWinklevoss,Founder,WinklevossCapitalTylerWinklevoss,Founder,

WinklevossCapitalPindarWong,InternetPioneer,ChairmanofVeriFi

GabrielWoo,VicePresidentofInnovation,RBCFinancialGroupGavin

Wood,CTO,EthereumFoundation

AaronWright,Professor,CardozoLawSchool,YeshivaUniversityJonathan

Zittrain,HarvardLawSchool

Alsospecialthankstoafewpeoplewhoreallyrolleduptheirsleevestohelp.

AnthonyWilliamsandJoanBighamoftheGSNprojectworkedcloselywith

Alexontheoriginaldigitalcurrenciesgovernancepaper.FormerCisco

executiveJoanMcCalladiddeepresearchforthechaptersontheInternetof

ThingsandalsoGovernmentandDemocracy.Wereceivedalotoffamilial

support.ITexecutiveBobTapscottspentmanydaysdownloadingandgetting

underthehoodoftheentirebitcoinblockchaintogiveusfirsthandinsightson

someofthetechnicalissues.TechnologyentrepreneurBillTapscottcameup

withtherevolutionaryideaofablockchain-basedpersonalcarboncredittrading

system,andtechnologyexecutiveNikiTapscottandherhusband,financial

analystJamesLeo,havebeengreatsoundingboardsthroughout.Katherine

MacLellanoftheTapscottGroup(convenientlyalawyer)tackledsomeofthe

tougherissuesaroundsmartcontractsaswellasmanagingtheinterviewprocess.

PhilCourneyeurwasonthelookoutdailyforjuicymaterial,andDavidTicoll

providedhelpfulinsightsaboutthestateofthedigitalagesofar.WesNeffand

BillLeighoftheLeighBureauhelpeduscraftthebookconcept(howmany

booksisthis,guys?).Asalways(nowmorethantwentyyears),JodyStevens

flawlesslymanagedtheadministrationfortheentireprojectincludingdatabases,

finances,anddocumentmanagement,aswellastheproofreadingandproduction

process—afull-timejob,inadditiontoherotherfull-timejobsattheTapscott

Group.

SpecialthankstoDinoMarkAngaritis,theCEOofblockchaincompany

Smartwallet;JosephLubin,CEOoftheEthereumdevelopmentstudio

ConsensusSystems;andCarlosMoreiraoffast-growingsecuritycompany

WISeKey—whoeachspentconsiderabletimewithusbrainstormingideas.They

areeachbrilliantandsokindtohelpusout.Nowwegettoenjoywitnessingthe

successofeachoftheirbusinessesinthisspace.Alsobigthankstothegreat

teamatPenguinRandomHouseledbyoureditorJesseMaeshiroandoverseen

byAdrianZackheim.

Mostimportant,we’dliketogiveourheartfeltthankstoourwives,Ana

Lopes(Don)andAmyWelsman(Alex),whomorethantoleratedourobsession

withcrackingthisbignutoverthebetterpartofayear.Wearebothvery

fortunatetohavesuchwonderfullifepartners.

Writingthisbookhasbeenajoyousexperienceforbothofusandit’sfairto

saythatwelovedeveryminuteofit.Assomeonefamousoncesaid,“Iftwo

peopleagreeoneverything,oneofthemisunnecessary.”Wechallengedeach

otherdailytotestourbeliefsandassumptions,andthisbookislivingproofof

thathealthyandvigorouscollaboration.Mindyou,collaboratingdoesseem

effortlesswhenyousharesomuchDNAandhaveasharedthirty-yearhistoryof

exploringtheworldtogether.Wedohopeyoufindtheproductofthis

collaborationimportantandhelpful.

DonTapscottandAlexTapscott,January2016

PARTI

SAYYOUWANTAREVOLUTION

CHAPTER1



THETRUSTPROTOCOL

tappearsthatonceagain,thetechnologicalgeniehasbeenunleashedfromits

bottle.Summonedbyanunknownpersonorpersonswithunclearmotives,at

anuncertaintimeinhistory,thegenieisnowatourserviceforanotherkickat

thecan—totransformtheeconomicpowergridandtheoldorderofhuman

affairsforthebetter.Ifwewillit.

Letusexplain.

ThefirstfourdecadesoftheInternetbroughtuse-mail,theWorldWide

Web,dot-coms,socialmedia,themobileWeb,bigdata,cloudcomputing,and

theearlydaysoftheInternetofThings.Ithasbeengreatforreducingthecosts

ofsearching,collaborating,andexchanginginformation.Ithasloweredthe

barrierstoentryfornewmediaandentertainment,newformsofretailingand

organizingwork,andunprecedenteddigitalventures.Throughsensor

technology,ithasinfusedintelligenceintoourwallets,ourclothing,our

automobiles,ourbuildings,ourcities,andevenourbiology.Itissaturatingour

environmentsocompletelythatsoonwewillnolonger“logon”butrathergo

aboutourbusinessandourlivesimmersedinpervasivetechnology.

Overall,theInternethasenabledmanypositivechanges—forthosewith

accesstoit—butithasseriouslimitationsforbusinessandeconomicactivity.

TheNewYorkercouldrerunPeterSteiner’s1993cartoonofonedogtalkingto

anotherwithoutrevision:“OntheInternet,nobodyknowsyou’readog.”Online,

westillcan’treliablyestablishoneanother’sidentitiesortrustoneanotherto

transactandexchangemoneywithoutvalidationfromathirdpartylikeabankor

agovernment.Thesesameintermediariescollectourdataandinvadeourprivacy

forcommercialgainandnationalsecurity.EvenwiththeInternet,theircost

structureexcludessome2.5billionpeoplefromtheglobalfinancialsystem.

Despitethepromiseofapeer-to-peerempoweredworld,theeconomicand

politicalbenefitshaveproventobeasymmetrical—withpowerandprosperity

channeledtothosewhoalreadyhaveit,evenifthey’renolongerearningit.

Moneyismakingmoremoneythanmanypeopledo.

Technologydoesn’tcreateprosperityanymorethanitdestroysprivacy.

However,inthisdigitalage,technologyisattheheartofjustabouteverything—

goodandbad.Itenableshumanstovalueandtoviolateoneanother’srightsin

profoundnewways.Theexplosioninonlinecommunicationandcommerceis

creatingmoreopportunitiesforcybercrime.Moore’slawoftheannualdoubling

ofprocessingpowerdoublesthepoweroffraudstersandthieves—“Moore’s

Outlaws”

—nottomentionspammers,identitythieves,phishers,spies,zombie

farmers,hackers,cyberbullies,anddatanappers—criminalswhounleash

ransomwaretoholddatahostage—thelistgoeson.

INSEARCHOFTHETRUSTPROTOCOL

Asearlyas1981,inventorswereattemptingtosolvetheInternet’sproblemsof

privacy,security,andinclusionwithcryptography.Nomatterhowthey

reengineeredtheprocess,therewerealwaysleaksbecausethirdpartieswere

involved.PayingwithcreditcardsovertheInternetwasinsecurebecauseusers

hadtodivulgetoomuchpersonaldata,andthetransactionfeesweretoohighfor

smallpayments.

In1993,abrilliantmathematiciannamedDavidChaumcameupwith

eCash,adigitalpaymentsystemthatwas“atechnicallyperfectproductwhich

madeitpossibletosafelyandanonymouslypayovertheInternet....Itwas

perfectlysuitedtosendingelectronicpennies,nickels,anddimesoverthe

Internet.”

ItwassoperfectthatMicrosoftandotherswereinterestedin

includingeCashasafeatureintheirsoftware.

Thetroublewas,onlineshoppers

didn’tcareaboutprivacyandsecurityonlinethen.Chaum’sDutchcompany

DigiCashwentbankruptin1998.

Aroundthattime,oneofChaum’sassociates,NickSzabo,wroteashort

paperentitled“TheGodProtocol,”atwistonNobellaureateLeonLederman’s

phrase“theGodparticle,”referringtotheimportanceoftheHiggsbosonto

modernphysics.Inhispaper,Szabomusedaboutthecreationofabe-allend-all

technologyprotocol,onethatdesignatedGodthetrustedthirdpartyinthe

middleofalltransactions:“AllthepartieswouldsendtheirinputstoGod.God

wouldreliablydeterminetheresultsandreturntheoutputs.Godbeingthe

ultimateinconfessionaldiscretion,nopartywouldlearnanythingmoreabout

theotherparties’inputsthantheycouldlearnfromtheirowninputsandthe

output.”

Hispointwaspowerful:DoingbusinessontheInternetrequiresaleap

offaith.Becausetheinfrastructurelacksthemuch-neededsecurity,weoften

havelittlechoicebuttotreatthemiddlemenasiftheyweredeities.

Adecadelaterin2008,theglobalfinancialindustrycrashed.Perhaps

propitiously,apseudonymouspersonorpersonsnamedSatoshiNakamoto

outlinedanewprotocolforapeer-to-peerelectroniccashsystemusinga

cryptocurrencycalledbitcoin.Cryptocurrencies(digitalcurrencies)aredifferent

fromtraditionalfiatcurrenciesbecausetheyarenotcreatedorcontrolledby

countries.Thisprotocolestablishedasetofrules—intheformofdistributed

computations—thatensuredtheintegrityofthedataexchangedamongthese

billionsofdeviceswithoutgoingthroughatrustedthirdparty.Thisseemingly

subtleactsetoffasparkthathasexcited,terrified,orotherwisecapturedthe

imaginationofthecomputingworldandhasspreadlikewildfiretobusinesses,

governments,privacyadvocates,socialdevelopmentactivists,mediatheorists,

andjournalists,tonameafew,everywhere.

“They’relike,‘Ohmygod,thisisit.Thisisthebigbreakthrough.Thisisthe

thingwe’vebeenwaitingfor,’”saidMarcAndreessen,thecocreatorofthefirst

commercialWebbrowser,Netscape,andabiginvestorintechnologyventures.

“‘Hesolvedalltheproblems.WhoeverheisshouldgettheNobelPrize—he’sa

genius.’Thisisthething!ThisisthedistributedtrustnetworkthattheInternet

alwaysneededandneverhad.”

Todaythoughtfulpeopleeverywherearetryingtounderstandthe

implicationsofaprotocolthatenablesmeremortalstomanufacturetrustthrough

clevercode.Thishasneverhappenedbefore—trustedtransactionsdirectly

betweentwoormoreparties,authenticatedbymasscollaborationandpowered

bycollectiveself-interests,ratherthanbylargecorporationsmotivatedbyprofit.

ItmaynotbetheAlmighty,butatrustworthyglobalplatformforour

transactionsissomethingverybig.We’recallingittheTrustProtocol.

Thisprotocolisthefoundationofagrowingnumberofglobaldistributed

ledgerscalledblockchains—ofwhichthebitcoinblockchainisthelargest.While

thetechnologyiscomplicatedandthewordblockchainisn’texactlysonorous,

themainideaissimple.Blockchainsenableustosendmoneydirectlyandsafely

frommetoyou,withoutgoingthroughabank,acreditcardcompany,orPayPal.

RatherthantheInternetofInformation,it’stheInternetofValueorof

Money.It’salsoaplatformforeveryonetoknowwhatistrue—atleastwith

regardtostructuredrecordedinformation.Atitsmostbasic,itisanopensource

code:anyonecandownloaditforfree,runit,anduseittodevelopnewtoolsfor

managingtransactionsonline.Assuch,itholdsthepotentialforunleashing

countlessnewapplicationsandasyetunrealizedcapabilitiesthathavethe

potentialtotransformmanythings.

HOWTHISWORLDWIDELEDGERWORKS

Bigbanksandsomegovernmentsareimplementingblockchainsasdistributed

ledgerstorevolutionizethewayinformationisstoredandtransactionsoccur.

Theirgoalsarelaudable—speed,lowercost,security,fewererrors,andthe

eliminationofcentralpointsofattackandfailure.Thesemodelsdon’t

necessarilyinvolveacryptocurrencyforpayments.

However,themostimportantandfar-reachingblockchainsarebasedon

Satoshi’sbitcoinmodel.Here’showtheywork.

Bitcoinorotherdigitalcurrencyisn’tsavedinafilesomewhere;it’s

representedbytransactionsrecordedinablockchain—kindoflikeaglobal

spreadsheetorledger,whichleveragestheresourcesofalargepeer-to-peer

bitcoinnetworktoverifyandapproveeachbitcointransaction.Eachblockchain,

liketheonethatusesbitcoin,isdistributed:itrunsoncomputersprovidedby

volunteersaroundtheworld;thereisnocentraldatabasetohack.Theblockchain

ispublic:anyonecanviewitatanytimebecauseitresidesonthenetwork,not

withinasingleinstitutionchargedwithauditingtransactionsandkeeping

records.Andtheblockchainisencrypted:itusesheavy-dutyencryption

involvingpublicandprivatekeys(ratherlikethetwo-keysystemtoaccessa

safetydepositbox)tomaintainvirtualsecurity.Youneedn’tworryaboutthe

weakfirewallsofTargetorHomeDepotorathievingstafferofMorganStanley

ortheU.S.federalgovernment.

Everytenminutes,liketheheartbeatofthebitcoinnetwork,allthe

transactionsconductedareverified,cleared,andstoredinablockwhichis

linkedtotheprecedingblock,therebycreatingachain.Eachblockmustreferto

theprecedingblocktobevalid.Thisstructurepermanentlytime-stampsand

storesexchangesofvalue,preventinganyonefromalteringtheledger.Ifyou

wantedtostealabitcoin,you’dhavetorewritethecoin’sentirehistoryonthe

blockchaininbroaddaylight.That’spracticallyimpossible.Sotheblockchainis

adistributedledgerrepresentinganetworkconsensusofeverytransactionthat

haseveroccurred.LiketheWorldWideWebofinformation,it’stheWorldWide

Ledgerofvalue—adistributedledgerthateveryonecandownloadandrunon

theirpersonalcomputer.

Somescholarshavearguedthattheinventionofdouble-entrybookkeeping

enabledtheriseofcapitalismandthenation-state.Thisnewdigitalledgerof

economictransactionscanbeprogrammedtorecordvirtuallyeverythingof

valueandimportancetohumankind:birthanddeathcertificates,marriage

licenses,deedsandtitlesofownership,educationaldegrees,financialaccounts,

medicalprocedures,insuranceclaims,votes,provenanceoffood,andanything

elsethatcanbeexpressedincode.

Thenewplatformenablesareconciliationofdigitalrecordsregardingjust

abouteverythinginrealtime.Infact,soonbillionsofsmartthingsinthe

physicalworldwillbesensing,responding,communicating,buyingtheirown

electricityandsharingimportantdata,doingeverythingfromprotectingour

environmenttomanagingourhealth.ThisInternetofEverythingneedsaLedger

ofEverything.Business,commerce,andtheeconomyneedaDigitalReckoning.

Sowhyshouldyoucare?Webelievethetruthcansetusfreeanddistributed

trustwillprofoundlyaffectpeopleinallwalksoflife.Maybeyou’reamusic

loverwhowantsartiststomakealivingofftheirart.Oraconsumerwhowants

toknowwherethathamburgermeatreallycamefrom.Perhapsyou’rean

immigrantwho’ssickofpayingbigfeestosendmoneyhometolovedonesin

yourancestralland.OraSaudiwomanwhowantstopublishherownfashion

magazine.Maybeyou’reanaidworkerwhoneedstoidentifylandtitlesof

landownerssoyoucanrebuildtheirhomesafteranearthquake.Oracitizenfed

upwiththelackoftransparencyandaccountabilityofpoliticalleaders.Orauser

ofsocialmediawhovaluesyourprivacyandthinksallthedatayougenerate

mightbeworthsomething—toyou.Evenaswewrite,innovatorsarebuilding

blockchain-basedapplicationsthatservetheseends.Andtheyarejustthe

beginning.

ARATIONALEXUBERANCEFORTHEBLOCKCHAIN

Forsure,blockchaintechnologyhasprofoundimplicationsformanyinstitutions.

Whichhelpsexplainalltheexcitementfrommanysmartandinfluentialpeople.

BenLawskyquithisjobasthesuperintendentoffinancialservicesforNew

YorkStatetobuildanadvisorycompanyinthisspace.Hetoldus,“Infivetoten

years,thefinancialsystemmaybeunrecognizable...andIwanttobepartof

thechange.”

BlytheMasters,formerlychieffinancialofficerandheadofGlobal

CommoditiesatJPMorgan’sinvestmentbank,launchedablockchain-focused

technologystart-uptotransformtheindustry.ThecoveroftheOctober2015

BloombergMarketsfeaturedMasterswiththeheadline“It’sAllAboutthe

Blockchain.”Likewise,TheEconomistrananOctober2015coverstory,“The

TrustMachine,”whicharguedthat“thetechnologybehindbitcoincouldchange

howtheeconomyworks.”

ToTheEconomist,blockchaintechnologyis“the

greatchainofbeingsureaboutthings.”Bankseverywherearescramblingtop-

levelteamstoinvestigateopportunities,someofthesewithdozensof

crackerjacktechnologists.Bankerslovetheideaofsecure,frictionless,and

instanttransactions,butsomeflinchattheideaofopenness,decentralization,

andnewformsofcurrency.Thefinancialservicesindustryhasalready

rebrandedandprivatizedblockchaintechnology,referringtoitasdistributed

ledgertechnology,inanattempttoreconcilethebestofbitcoin—security,speed,

andcost—withanentirelyclosedsystemthatrequiresabankorfinancial

institution’spermissiontouse.Tothem,blockchainsaremorereliabledatabases

thanwhattheyalreadyhave,databasesthatenablekeystakeholders—buyers,

sellers,custodians,andregulators—tokeepshared,indeliblerecords,thereby

reducingcost,mitigatingsettlementrisk,andeliminatingcentralpointsof

failure.

Investinginblockchainstart-upsistakingoff,asdidinvestingindot-coms

inthe1990s.Venturecapitalistsareshowingenthusiasmatalevelthatwould

makea1990sdot-cominvestorblush.In2014and2015alone,morethan$1

billionofventurecapitalfloodedintotheemergingblockchainecosystem,and

therateofinvestmentisalmostdoublingannually.

“We’requiteconfident,”

saidMarcAndreesseninaninterviewwithTheWashingtonPost,“thatwhen

we’resittingherein20years,we’llbetalkingabout[blockchaintechnology]the

waywetalkabouttheInternettoday.”

Regulatorshavealsosnappedtoattention,establishingtaskforcestoexplore

whatkindoflegislation,ifany,makessense.Authoritariangovernmentslike

Russia’shavebannedorseverelylimitedtheuseofbitcoin,ashavedemocratic

statesthatshouldknowbetter,likeArgentina,givenitshistoryofcurrency

crises.MorethoughtfulgovernmentsintheWestareinvestingconsiderablyin

understandinghowthenewtechnologycouldtransformnotonlycentralbanking

andthenatureofmoney,butalsogovernmentoperationsandthenatureof

democracy.CarolynWilkins,theseniordeputygovernoroftheBankofCanada,

believesit’stimeforcentralbankseverywheretoseriouslystudythe

implicationsofmovingentirenationalcurrencysystemstodigitalmoney.The

BankofEngland’stopeconomist,AndrewHaldane,hasproposedanational

digitalcurrencyfortheUnitedKingdom.

Theseareheadytimes.Tobesure,thegrowingthrongofenthusiastshasits

shareofopportunists,speculators,andcriminals.Thefirsttalemostpeoplehear

aboutdigitalcurrenciesisthebankruptcyoftheMt.Goxexchangeorthe

convictionofRossWilliamUlbricht,founderoftheSilkRoaddarknetmarket

seizedbytheFederalBureauofInvestigationfortraffickingillegaldrugs,child

pornography,andweaponsusingthebitcoinblockchainasapaymentsystem.

Bitcoin’spricehasfluctuateddrastically,andtheownershipofbitcoinsisstill

concentrated.A2013studyshowedthat937peopleownedhalfofallbitcoin,

althoughthatischangingtoday.

HowdowegetfrompornandPonzischemestoprosperity?Tobegin,it’s

notbitcoin,thestillspeculativeasset,thatshouldinterestyou,unlessyou’rea

trader.Thisbookisaboutsomethingbiggerthantheasset.It’saboutthepower

andpotentialoftheunderlyingtechnologicalplatform.

Thisisnottosaythatbitcoinorcryptocurrenciesperseareunimportant,as

somepeoplehavesuggestedastheyscrambletodisassociatetheirprojectsfrom

thescandalousventuresofthepast.Thesecurrenciesarecriticaltothe

blockchainrevolution,whichisfirstandforemostaboutthepeer-to-peer

exchangeofvalue,especiallymoney.

ACHIEVINGTRUSTINTHEDIGITALAGE

Trustinbusinessistheexpectationthattheotherpartywillbehaveaccordingto

thefourprinciplesofintegrity:honesty,consideration,accountability,and

transparency.

Honestyisnotjustanethicalissue;ithasbecomeaneconomicone.To

establishtrustingrelationshipswithemployees,partners,customers,

shareholders,andthepublic,organizationsmustbetruthful,accurate,and

completeincommunications.Nolyingthroughomission,noobfuscation

throughcomplexity.

Considerationinbusinessoftenmeansafairexchangeofbenefitsor

detrimentsthatpartieswilloperateingoodfaith.Buttrustrequiresagenuine

respectfortheinterests,desires,orfeelingsofothers,andthatpartiescan

operatewithgoodwilltowardoneanother.

Accountabilitymeansmakingclearcommitmentstostakeholdersand

abidingbythem.Individualsandinstitutionsalikemustdemonstratethatthey

havehonoredtheircommitmentsandownedtheirbrokenpromises,preferably

withtheverificationofthestakeholdersthemselvesorindependentoutside

experts.Nopassingthebuck,noplayingtheblamegame.

Transparencymeansoperatingoutintheopen,inthelightofday.“What

aretheyhiding?”isasignofpoortransparencythatleadstodistrust.Ofcourse,

companieshavelegitimaterightstotradesecretsandotherkindsofproprietary

information.Butwhenitcomestopertinentinformationforcustomers,

shareholders,employees,andotherstakeholders,activeopennessiscentralto

earningtrust.Ratherthandressingforsuccess,corporationscanundressfor

success.

Trustinbusinessandotherinstitutionsismostlyatanall-timelow.The

publicrelationscompanyEdelman’s2015“TrustBarometer”indicatesthattrust

ininstitutions,especiallycorporations,hasfallenbacktolevelsfromthe

dismallylowperiodofthe2008greatrecession.Edelmannotedthateventhe

onceimpregnabletechnologyindustry,stillthemosttrustedbusinesssector,saw

declinesinthemajorityofcountriesforthefirsttime.Globally,CEOsand

governmentofficialscontinuetobetheleastcredibleinformationsources,

laggingfarbehindacademicorindustryexperts.

Similarly,Gallupreportedin

its2015surveyofAmericanconfidenceininstitutionsthat“business”ranked

secondlowestamongthefifteeninstitutionsmeasured;fewerthan20percentof

respondentsindicatedtheyhadconsiderableorhighlevelsoftrust.OnlytheU.S.

Congresshadalowerscore.

Inthepreblockchainworld,trustintransactionsderivedfromindividuals,

intermediaries,orotherorganizationsactingwithintegrity.Becauseweoften

can’tknowourcounterparties,letalonewhethertheyhaveintegrity,we’vecome

torelyonthirdpartiesnotonlytovouchforstrangers,butalsotomaintain

transactionrecordsandperformthebusinesslogicandtransactionlogicthat

powerscommerceonline.Thesepowerfulintermediaries—banks,governments,

PayPal,Visa,Uber,Apple,Google,andotherdigitalconglomerates—harvest

muchofthevalue.

Intheemergingblockchainworld,trustderivesfromthenetworkandeven

fromobjectsonthenetwork.CarlosMoreiraofthecryptographicsecurity

companyWISeKeysaidthatthenewtechnologieseffectivelydelegatetrust—

eventophysicalthings.“Ifanobject,whetheritbeasensorona

communicationstower,alightbulb,oraheartmonitor,isnottrustedtoperform

wellorpayforservicesitwillberejectedbytheotherobjectsautomatically.”

Theledgeritselfisthefoundationoftrust.

Tobeclear,“trust”referstobuyingandsellinggoodsandservicesandtothe

integrityandprotectionofinformation,nottrustinallbusinessaffairs.However,

youwillreadthroughoutthisbookhowagloballedgeroftruthfulinformation

canhelpbuildintegrityintoallourinstitutionsandcreateamoresecureand

trustworthyworld.Inourview,companiesthatconductsomeoralloftheir

transactionsontheblockchainwillenjoyatrustbumpinshareprice.

Shareholdersandcitizenswillcometoexpectallpubliclytradedfirmsand

taxpayer-fundedorganizationstoruntheirtreasuries,atminimum,onthe

blockchain.Becauseofincreasedtransparency,investorswillbeabletosee

whetheraCEOreallydeservedthatfatbonus.Smartcontractsenabledby

blockchainswillrequirecounterpartiestoabidebytheircommitmentsandvoters

willbeabletoseewhethertheirrepresentativesarebeinghonestoractingwith

fiscalintegrity.

RETURNOFTHEINTERNET

ThefirsteraoftheInternetstartedwiththeenergyandspiritofayoungLuke

Skywalker—withthebeliefthatanykidfromaharshdesertplanetcouldbring

downanevilempireandstartanewcivilizationbylaunchingadot-com.Naïve

tobesure,butmanypeople,presentcompanyincluded,hopedtheInternet,as

embodiedintheWorldWideWeb,woulddisrupttheindustrialworldwhere

powerwasgrippedbythefewandpowerstructureswerehardtoclimband

hardertotopple.Unliketheoldmediathatwerecentralizedandcontrolledby

powerfulforces,andwheretheuserswereinert,thenewmediaweredistributed

andneutral,andeveryonewasanactiveparticipantratherthanapassive

recipient.Lowcostandmassivepeer-to-peercommunicationontheInternet

wouldhelpunderminetraditionalhierarchiesandhelpwiththeinclusionof

developingworldcitizensintheglobaleconomy.Valueandreputationwould

derivefromqualityofcontribution,notstatus.Ifyouweresmartand

hardworkinginIndia,yourmeritwouldbringyoureputation.Theworldwould

beflatter,moremeritocratic,moreflexible,andmorefluid.Mostimportant,

technologywouldcontributetoprosperityforeveryone,notjustwealthforthe

few.

Someofthishascometopass.Therehavebeenmasscollaborationslike

Wikipedia,Linux,andGalaxyZoo.Outsourcingandnetworkedbusinessmodels

haveenabledpeopleinthedevelopingworldtoparticipateintheglobal

economybetter.Todaytwobillionpeoplecollaborateaspeerssocially.Weall

haveaccesstoinformationinunprecedentedways.

However,theEmpirestruckback.Ithasbecomeclearthatconcentrated

powersinbusinessandgovernmenthavebenttheoriginaldemocratic

architectureoftheInternettotheirwill.

Hugeinstitutionsnowcontrolandownthisnewmeansofproductionand

socialinteraction—itsunderlyinginfrastructure;massiveandgrowingtreasure

trovesofdata;thealgorithmsthatincreasinglygovernbusinessanddailylife;

theworldofapps;andextraordinaryemergingcapabilities,machinelearning,

andautonomousvehicles.FromSiliconValleyandWallStreettoShanghaiand

Seoul,thisnewaristocracyusesitsinsideradvantagetoexploitthemost

extraordinarytechnologyeverdevisedtoempowerpeopleaseconomicactors,to

buildspectacularfortunesandstrengthenitspowerandinfluenceover

economiesandsocieties.

Manyofthedarksideconcernsraisedbyearlydigitalpioneershavepretty

muchmaterialized.

Wehavegrowthingrossdomesticproductbutnot

commensuratejobgrowthinmostdevelopedcountries.Wehavegrowingwealth

creationandgrowingsocialinequality.Powerfultechnologycompanieshave

shiftedmuchactivityfromtheopen,distributed,egalitarian,andempowering

Webtoclosedonlinewalledgardensorproprietary,read-onlyapplicationsthat

amongotherthingskilltheconversation.Corporateforceshavecapturedmany

ofthesewonderfulpeer-to-peer,democratic,andopentechnologiesandare

usingthemtoextractaninordinateshareofvalue.

Theupshotisthat,ifanything,economicpowerhasgottenspikier,more

concentrated,andmoreentrenched.Ratherthandatabeingmorewidelyand

democraticallydistributed,itisbeinghoardedandexploitedbyfewerentities

thatoftenuseittocontrolmoreandacquiremorepower.Ifyouaccumulatedata

andthepowerthatcomeswithit,youcanfurtherfortifyyourpositionby

producingproprietaryknowledge.Thisprivilegetrumpsmerit,regardlessofits

origin.

Further,powerful“digitalconglomerates”suchasAmazon,Google,Apple,

andFacebook—allInternetstart-upsatonetime—arecapturingthetreasure

trovesofdatathatcitizensandinstitutionsgenerateofteninprivatedatasilos

ratherthanontheWeb.Whiletheycreategreatvalueforconsumers,oneupshot

isthatdataisbecominganewassetclass—onethatmaytrumppreviousasset

classes.Anotheristheunderminingofourtraditionalconceptsofprivacyand

theautonomyoftheindividual.

GovernmentsofallkindsusetheInternettoimproveoperationsand

services,buttheynowalsodeploytechnologytomonitorandevenmanipulate

citizens.Inmanydemocraticcountries,governmentsuseinformationand

communicationstechnologiestospyoncitizens,changepublicopinion,further

theirparochialinterests,underminerightsandfreedoms,andoveralltostayin

power.RepressivegovernmentslikethoseofChinaandIranenclosetheInternet,

exploitingittocrackdownondissentandmobilizecitizensaroundtheir

objectives.

ThisisnottosaythattheWebisdead,assomehavesuggested.TheWebis

criticaltothefutureofthedigitalworldandallofusshouldsupportefforts

underwaytodefendit,suchasthoseoftheWorldWideWebFoundation,who

arefightingtokeepitopen,neutral,andconstantlyevolving.

Now,withblockchaintechnology,aworldofnewpossibilitieshasopened

uptoreverseallthesetrends.Wenowhaveatruepeer-to-peerplatformthat

enablesthemanyexcitingthingswe’vediscussedinthisbook.Wecaneachown

ouridentitiesandourpersonaldata.Wecandotransactions,creatingand

exchangingvaluewithoutpowerfulintermediariesactingasthearbitersof

moneyandinformation.Billionsofexcludedpeoplecansoonentertheglobal

economy.Wecanprotectourprivacyandmonetizeourowninformation.Wecan

ensurethatcreatorsarecompensatedfortheirintellectualproperty.Ratherthan

tryingtosolvetheproblemofgrowingsocialinequalitythroughthe

redistributionofwealthonly,wecanstarttochangethewaywealthis

distributed—howitiscreatedinthefirstplace,aspeopleeverywherefrom

farmerstomusicianscansharemorefully,apriori,inthewealththeycreate.The

skydoesseemtobethelimit.

It’smoreYodathanGod.Butthisnewprotocol,ifnotdivine,doesenable

trustedcollaborationtooccurinaworldthatneedsit,andthat’salot.Excited,

weare.

YOURPERSONALAVATARANDTHEBLACKBOXOFIDENTITY

Throughouthistory,eachnewformofmediahasenabledmankindtotranscend

time,space,andmortality.That—darewesay—divineabilityinevitablyraises

anewtheexistentialquestionofidentity:Whoarewe?Whatdoesitmeantobe

human?Howdoweconceptualizeourselves?AsMarshallMcLuhanobserved,

themediumbecomesthemessageovertime.Peopleshapeandareshapedby

media.Ourbrainsadapt.Ourinstitutionsadapt.Societyadapts.

“Todayyouneedanorganizationwithendowedrightstoprovideyouwith

anidentity,likeabankcard,afrequentflyercard,oracreditcard,”

saidCarlos

MoreiraofWISeKey.Yourparentsgaveyouaname,thestate-licensed

obstetricianormidwifewhodeliveredyoutookyourfootprintandvouchedfor

yourweightandlength,andbothpartiesattestedtothetime,date,andplaceof

yourarrivalbysigningyourbirthcertificate.Nowtheycanrecordthiscertificate

ontheblockchainandlinkbirthannouncementsandacollegefundtoit.Friends

andfamilycancontributebitcointoyourhighereducation.There,yourdataflow

begins.

IntheearlydaysoftheInternet,TomPeterswrote,“Youareyour

projects.”

Hemeantthatourcorporateaffiliationsandjobtitlesnolonger

definedus.Whatisequallytruenow:“Youareyourdata.”Troubleis,Moreira

said,“Thatidentityisnowyours,butthedatathatcomesfromitsinteractionin

theworldisownedbysomeoneelse.”

That’showmostcorporationsand

institutionsviewyou,byyourdatacontrailacrosstheInternet.Theyaggregate

yourdataintoavirtualrepresentationofyou,andtheyprovidethis“virtualyou”

withextraordinarynewbenefitsbeyondyourparents’happiestdreams.

But

conveniencecomeswithaprice:privacy.Thosewhosay“privacyisdead—get

overit”arewrong.

Privacyisthefoundationoffreesocieties.

“Peoplehaveaverysimplisticviewofidentity,”

saidblockchaintheorist

AndreasAntonopoulos.Weusethewordidentitytodescribetheself,the

projectionofthatselftotheworld,andalltheseattributesthatweassociatewith

thatselforoneofitsprojections.Thesemaycomefromnature,fromthestate,

fromprivateorganizations.Wemayhaveoneormorerolesandaseriesof

metricsattachedtothoseroles,andtherolesmaychange.Consideryourlastjob.

Didyourrolechangeorganicallybecauseofchangesintheworkthatneededto

bedoneorbecauseofrevisionstoyourjobdescription?

Whatif“thevirtualyou”wasinfactownedbyyou—yourpersonalavatar—

and“lived”intheblackboxofyouridentitysothatyoucouldmonetizeyour

datastreamandrevealonlywhatyouneededto,whenassertingaparticular

right.Whydoesyourdriver’slicensecontainmoreinformationthanthefactthat

youhavepassedyourdrivingtestanddemonstratedyourabilitytodrive?

ImagineaneweraoftheInternetwhereyourpersonalavatarmanagesand

protectsthecontentsofyourblackbox.Thistrustysoftwareservantcould

releaseonlytherequireddetailoramountforeachsituationandatthesametime

whiskupyourdatacrumbsasyounavigatethedigitalworld.

ThismaysoundlikethestuffofsciencefictionasportrayedinfilmslikeThe

MatrixorAvatar.Buttodayblockchaintechnologiesmakeitpossible.Joe

Lubin,CEOofConsensusSystems,referstothisconceptasa“persistentdigital

IDandpersona”onablockchain.“Ishowadifferentaspectofmyselftomy

collegefriendscomparedtowhenIamspeakingattheChicagoFed,”hesaid.

“Intheonlinedigitaleconomy,Iwillrepresentmyvariousaspectsandinteract

inthatworldfromtheplatformofdifferentpersonas.”Lubinexpectstohavea

“canonicalpersona,”theversionofhimthatpaystaxes,obtainsloans,andgets

insurance.“Iwillhaveperhapsabusinesspersonaandafamilypersonato

separatetheconcernsthatIchoosetolinktomycanonicalpersona.Imayhavea

gamerpersonathatIdon’twantlinkedtomybusinesspersona.Imighteven

haveadarkwebpersonathatisneverlinkabletotheothers.”

Yourblackboxmayincludeinformationsuchasagovernment-issuedID,

SocialSecuritynumber,medicalinformation,serviceaccounts,financial

accounts,diplomas,practicelicenses,birthcertificate,variousothercredentials,

andinformationsopersonalyoudon’twanttorevealitbutdowanttomonetize

itsvalue,suchassexualpreferenceormedicalcondition,forapolloraresearch

study.Youcouldlicensethesedataforspecificpurposestospecificentitiesfor

specificperiodsoftime.Youcouldsendasubsetofyourattributestoyoureye

doctorandadifferentsubsettothehedgefundthatyouwouldliketoinvestin.

Youravatarcouldansweryes-noquestionswithoutdisclosingwhoyouare:“Are

youtwenty-oneyearsorolder?Didyouearnmorethan$100,000ineachofthe

lastthreeyears?Doyouhaveabodymassindexinthenormalrange?”

Inthephysicalworld,yourreputationislocal—yourlocalshopkeeper,your

employer,yourfriendsatadinnerpartyallhaveacertainopinionaboutyou.In

thedigitaleconomy,thereputationsofvariouspersonasinyouravatarwillbe

portable.Portabilitywillhelpbringpeopleeverywhereintothedigitaleconomy.

PeoplewithadigitalwalletandavatarinAfricacouldestablishthereputation

requiredto,say,borrowmoneytostartabusiness.“See,allthesepeopleknow

meandhavevouchedforme.Iamfinanciallytrustworthy.Iamanenfranchised

citizenoftheglobaldigitaleconomy.”

Identityisonlyasmallpartofit.Therestisacloud—anidentitycloud—of

particulateslooselyortightlylinkedtoyouridentity.Ifwetrytorecordallthese

intotheblockchain,animmutableledger,welosenotonlythenuanceofsocial

interactionbutalsothegiftofforgetting.Peopleoughtneverbedefinedbytheir

worstday.

APLANFORPROSPERITY

Inthisbook,you’llreaddozensofstoriesaboutinitiativesenabledbythistrust

protocolthatcreatenewopportunitiesforamoreprosperousworld.Prosperity

firstandforemostisaboutone’sstandardofliving.Toachieveit,peoplemust

havethemeans,tools,andopportunitiestocreatematerialwealthandthrive

economically.Butforusitincludesmore—securityoftheperson,safety,health,

education,environmentalsustainability,opportunitiestoshapeandcontrolone’s

destinyandtoparticipateinaneconomyandsociety.Inordertoachieve

prosperity,anindividualmustpossess,atminimum,accesstosomeformof

basicfinancialservicestoreliablystoreandmovevalue,communication,and

transactionaltoolstoconnecttotheglobaleconomy,andsecurity,protection,

andenforcementofthetitletolandandotherassetstheypossesslegally.

This

andmoreisthepromiseoftheblockchain.Thestoriesyouwillreadshouldgive

youasenseofafuturewherethereisprosperityforeveryone,notjustmore

wealthandpowerforthewealthyandpowerful.Perhapsevenaworldwherewe

ownourdataandcanprotectourprivacyandpersonalsecurity.Anopenworld

whereeveryonecancontributetoourtechnologyinfrastructure,ratherthana

worldofwalledgardenswherebigcompaniesofferproprietaryapps.Aworld

wherebillionsofexcludedpeoplecannowparticipateintheglobaleconomyand

shareinitslargesse.Here’sapreview.

CreatingaTruePeer-to-PeerSharingEconomy

PunditsoftenrefertoAirbnb,Uber,Lyft,TaskRabbit,andothersasplatformsfor

the“sharingeconomy.”It’sanicenotion—thatpeerscreateandshareinvalue.

Butthesebusinesseshavelittletodowithsharing.Infact,theyaresuccessful

preciselybecausetheydonotshare—theyaggregate.Itisanaggregating

economy.Uberisa$65billioncorporationthataggregatesdrivingservices.

Airbnb,the$25billionSiliconValleydarling,aggregatesvacantrooms.Others

aggregateequipmentandhandymenthroughtheircentralized,proprietary

platformsandthenresellthem.Intheprocess,theycollectdataforcommercial

exploitation.Noneofthesecompaniesexistedadecadeagobecausethe

technologicalpreconditionswerenotthere:ubiquitoussmartphones,fullGPS,

andsophisticatedpaymentsystems.Nowwithblockchains,thetechnologyexists

toreinventtheseindustriesagain.Today’sbigdisruptersareabouttoget

disrupted.

ImagineinsteadofthecentralizedcompanyAirbnb,adistributedapplication

—callitblockchainAirbnborbAirbnb—essentiallyacooperativeownedbyits

members.Whenarenterwantstofindalisting,thebAirbnbsoftwarescansthe

blockchainforallthelistingsandfiltersanddisplaysthosethatmeethercriteria.

Becausethenetworkcreatesarecordofthetransactionontheblockchain,a

positiveuserreviewimprovestheirrespectivereputationsandestablishestheir

identities—nowwithoutanintermediary.SaysVitalikButerin,founderofthe

Ethereumblockchain:“Whereasmosttechnologiestendtoautomateworkerson

theperipherydoingmenialtasks,blockchainsautomateawaythecenter.Instead

ofputtingthetaxidriveroutofajob,blockchainputsUberoutofajobandlets

thetaxidriversworkwiththecustomerdirectly.”

RewiringtheFinancialSystemforSpeedandInclusion

Thefinancialservicesindustrymakesourglobaleconomyhum,butthesystem

todayisfraughtwithproblems.Forone,itisarguablythemostcentralized

industryintheworldandthelastindustrytofeelthetransformationaleffectof

thetechnologicalrevolution.Bastionsoftheoldfinancialordersuchasbanksgo

togreatlengthstodefendmonopoliesandoftenstymiedisruptiveinnovation.

Thefinancialsystemalsorunsonoutmodedtechnologyandisgovernedby

regulationsdatingbacktothenineteenthcentury.Itisrifewithcontradictions

andunevendevelopments,makingitsometimesslow,oftentimesinsecure,and

largelyopaquetomanystakeholders.

Distributedledgertechnologycanliberatemanyfinancialservicesfromthe

confinesofoldinstitutions,fosteringcompetitionandinnovation.That’sgood

fortheenduser.EvenwhenconnectedtotheoldInternet,billionsofpeopleare

excludedfromtheeconomyforthesimplereasonthatfinancialinstitutionsdon’t

provideserviceslikebankingtothembecausetheywouldbeunprofitableand

riskycustomers.Withtheblockchainthesepeoplecannotonlybecome

connected,butmoreimportantbecomeincludedinfinancialactivity,ableto

purchase,borrow,sell,andotherwisehaveachanceatbuildingaprosperouslife.

Similarlyincumbentinstitutionscantransformthemselvesaround

blockchaintechnology,iftheycanfindtheleadershiptodoit.Thetechnology

holdsgreatpromisetorevolutionizetheindustryforthegood—frombanksto

stockexchanges,insurancecompaniestoaccountingfirms,brokerages,

microlenders,creditcardnetworks,realestateagents,andeverythingin

between.Wheneveryonesharesthesamedistributedledger,settlementsdon’t

takedays,theyoccurinstantlyforalltosee.Billionswillbenefit,andthisshift

couldliberateandempowerentrepreneurseverywhere.

ProtectingEconomicRightsGlobally

Propertyrightsaresoinexorablytiedtooursystemofcapitalistdemocracythat

Jefferson’sfirstdraftoftheDeclarationofIndependencelistedtheinalienable

rightsofmanaslife,liberty,andthepursuitofproperty,nothappiness.

While

thoseaspirationaltenetslaidthegroundworkforthemoderneconomyand

societyweenjoyinmuchofthedevelopedworld,tothisdaymuchofthe

world’spopulationdoesnotreaptheirbenefits.Eventhoughsomeprogresshas

beenmadeinthedepartmentsoflifeandliberty,amajorityoftheworld’s

propertyholderscanhavetheirhomesortheirbitoflandseizedarbitrarilyby

corruptgovernmentfunctionaries,withtheflickofasoftwareswitchintheir

centralizedgovernmentpropertydatabase.Withoutproofofpropertyownership,

landownerscan’tsecurealoan,getabuildingpermit,orsellthepropertyand

theycanbeexpropriated—allseriousimpedimentstoprosperity.

PeruvianeconomistandpresidentoftheInstituteforLibertyandDemocracy

HernandodeSoto,oneoftheworld’sforemosteconomicminds,suggeststhatas

manyasfivebillionpeopleintheworldarebarredfromparticipatingfullyinthe

valuecreatedthroughglobalizationbecausetheyhaveatenuousrighttotheir

land.Blockchain,heargues,couldchangeallthat.“Thecentralideato

blockchainisthattherightstogoodscanbetransacted,whethertheybe

financial,hardassetsorideas.Thegoalisnotmerelytorecordtheplotofland

butrathertorecordtherightsinvolvedsothattherightsholdercannotbe

violated.”

Universalpropertyrightscouldlaythegroundworkforanew

agendaofglobaljustice,economicgrowth,prosperity,andpeace.Inthisnew

paradigm,rightsareprotected,notbygunsormilitiasorminutemen,butby

technology.“Blockchainisforaworldthat’sgovernedbyrealthingsinsteadof

fictitiousthings.AndIthinkthat’sgood,”

saiddeSoto.Andit’sdecentralized.

Nocentralauthoritycontrolsit,everybodyknowswhat’shappening,andit

remembersforever.

EndingtheRemittanceRip-off

Justabouteveryreport,article,orbookreviewingthebenefitsof

cryptocurrenciesdiscussestheopportunityofremittances.Andforgoodreason.

Thelargestflowoffundsintothedevelopingworldisnotforeignaidordirect

foreigninvestment.Rather,itisremittancemoneyrepatriatedtopoorcountries

fromtheirdiasporaslivingabroad.Theprocesstakestime,patience,and

sometimescouragetotraveleachweektothesamewiretransferoffice’sseedy

neighborhood,filloutthesamepaperworkeachtime,andpaythesame7

percentfee.Thereisabetterway.

Abraandothercompaniesarebuildingpaymentnetworksusingthe

blockchain.Abra’sgoalistoturneveryoneofitsusersintoateller.Thewhole

process—fromthefundsleavingonecountrytotheirarrivinginanother—takes

anhourratherthanaweekandcosts2percentversus7percentorhigher.Abra

wantsitspaymentnetworktooutnumberallphysicalATMsintheworld.Ittook

WesternUnion150yearstogetto500,000agentsworldwide.Abrawillhave

thatmanytellersinitsfirstyear.

CuttingOutBureaucracyandCorruptioninForeignAid

Couldblockchainsolveproblemswithforeignaid?The2010Haitiearthquake

wasoneofthedeadliestnaturaldisastersinrecordedhistory.Somewhere

between100,000and300,000peopleperished.ThegovernmentinHaitiproved

itselfaliabilityintheaftermath.Theglobalcommunitydonatedmorethan$500

milliontotheRedCross,aknownbrand.Anafter-actioninvestigationrevealed

thatfundsweremisspentorwentmissingaltogether.

Theblockchaincanimprovethedeliveryofforeignaidbyeliminatingthe

middlemenwhotaketheaidbeforeitreachesitsdestination.Second,asan

immutableledgeroftheflowoffunds,blockchainholdsinstitutionsmore

accountablefortheiractions.Imagineifyoucouldtrackeachdollaryougaveto

theRedCrossfromitsstartingpointonyoursmartphonetothepersonit

benefited.Youcouldparkyourfundsinescrow,releasingamountsaftertheRed

Crossreachedeachmilestone.

FeedingtheCreatorsofValueFirst

UnderthefirstgenerationoftheInternet,manycreatorsofintellectualproperty

didnotreceivepropercompensationforit.ExhibitAwasmusiciansand

composerswhohadsignedwithrecordlabelswhoseleadersfailedtoimagine

howtheInternetwouldaffecttheirindustry.Theyfailedtoembracethedigital

ageandreinventtheirownbusinessmodels,slowlycedingcontroltoinnovative

onlinedistributors.

Considerthemajorlabels’reactiontoNapster,thepeer-to-peermusicfile-

sharingplatformlaunchedin1999.Incumbentsinthemusicindustryteamedup

tosuethenewventure,itsfounders,andeighteenthousandofitsusers,

dismantlingtheplatformbyJuly2001.AlexWinter,directorofadocumentary

onNapster,toldTheGuardian,“Ihaveaproblemwithblack-and-whitethinking

whenitcomestobigculturalchanges....WithNapster,therewasanenormous

amountofgrey”betweenthe‘IcanshareeverythingI’vepaidfor’positionand

the‘You’reacriminalevenifyoushareonlyoneofthefilesyou’vepurchased’

pointofview.”

Weagree.Cocreatingwithconsumersisusuallyamoresustainablebusiness

modelthansuingthem.Thewholeincidentturnedahugehotspotlightonthe

musicindustry,exposingitsoutdatedmarketingpractices,grossdistribution

inefficiencies,andwhatsomeinterpretedasantimusicianpolicies.

Verylittlehaschangedsincethen.Untilnow.Welookatthenewmusic

ecosystememergingontheblockchain,ledbyBritishsinger-songwriterImogen

Heap,cellistZoëKeating,andblockchaindevelopersandentrepreneurs.Every

culturalindustryisupfordisruption,andthepromiseisthatcreatorsgetfully

compensatedforthevaluetheycreate.

ReconfiguringtheCorporationastheEngineofCapitalism

Withtheriseofaglobalpeer-to-peerplatformforidentity,trust,reputation,and

transactions,wewillfinallybeabletore-architectthedeepstructuresofthefirm

forinnovation,shared-valuecreation,andperhapsevenprosperityforthemany,

ratherthanjustwealthforthefew.Thisdoesn’tmeansmallerfirmsintermsof

revenueorimpact.Tothecontrary,we’retalkingaboutbuildingtwenty-first-

centurycompanies,somethatmaybemassivewealthcreatorsandpowerfulin

theirrespectivemarkets.Wedothinkenterpriseswilllookmorelikenetworks

ratherthantheverticallyintegratedhierarchiesoftheindustrialage.Assuch

thereisanopportunitytodistribute(notredistribute)wealthmore

democratically.

We’llalsotakeyouonastrollthroughthemind-bogglingworldofsmart

contracts,newautonomouseconomicagents,andwhatwecalldistributed

autonomousenterpriseswhereintelligentsoftwaretakesoverthemanagement

andorganizationofmanyresourcesandcapabilities,perhapsdisplacing

corporations.Smartcontractsenablethecreationofwhatwecallopen

networkedenterprisesbasedonanewsetofbusinessmodels,oroldbusiness

modelswithablockchaintwist.

AnimatingObjectsandPuttingThemtoWork

Technologistsandsciencefictionwritershavelongenvisionedaworldwherea

seamlessglobalnetworkofInternet-connectedsensorscouldcaptureevery

event,action,andchangeonearth.Blockchaintechnologywillenablethingsto

collaborate,exchangeunitsofvalue—energy,time,andmoney—and

reconfiguresupplychainsandproductionprocessesaccordingtoshared

informationondemandandcapacity.Wecanattachmetadatatosmartdevices

andprogramthemtorecognizeotherobjectsbytheirmetadataandtoactorreact

todefinedcircumstanceswithoutriskoferrorortampering.

Asthephysicalworldcomestolife,everyonecanprosper—fromsmall

farmersintheAustralianoutbackwhoneedelectricalpowerfortheirbusinesses

tohomeownerseverywherewhocanbecomepartofadistributedblockchain

powergrid.

CultivatingtheBlockchainEntrepreneur

Entrepreneurshipisessentialtoathrivingeconomyandaprosperoussociety.

TheInternetwassupposedtoliberateentrepreneurs,givingthemthetoolsand

capabilitiesofbigcompanieswithoutmanyoftheliabilities,suchaslegacy

culture,ossifiedprocesses,anddeadweight.However,thehigh-flyingsuccessof

dot-combillionairesobfuscatesanunsettlingtruth:entrepreneurshipandnew

businessstartshavebeensteadilydecliningforthirtyyearsinmanydeveloped

economies.

Inthedevelopingworld,theInternethasdonelittletolowerthe

barriersofwould-beentrepreneurswhomustsufferdeadeninggovernment

bureaucracies.TheInternethasalsonotliberatedthefinancialtoolsessentialto

startingabusinessavailabletobillionsofpeople.Noteveryoneisdestinedtobe

anentrepreneur,ofcourse,butevenfortheaveragepersontryingtoearna

decentwage,thelackoffinancialtoolsandtheprevalenceofgovernmentred

tapemakedoingsochallenging.

Thisisacomplexissue,butblockchaincanhelpsupercharge

entrepreneurshipandthereforeprosperityinmanyimportantways.Forthe

averagepersonlivinginthedevelopingworldtohaveareliablestoreofvalue

andawaytoconductbusinessbeyondhiscommunity,allheneedsnowisan

Internet-enableddevice.Accesstotheglobaleconomymeansgreateraccessto

newsourcesofcredit,funding,suppliers,partners,andinvestmentopportunities.

Notalentorresourceistoosmalltomonetizeontheblockchain.

RealizingGovernmentsbythePeopleforthePeople

Buckleupforbigchangesingovernmentandgovernancetoo.Blockchain

technologyisalreadyrevolutionizingthemachineryofgovernmentandhowwe

canmakeithighperformance—betterandcheaper.It’salsocreatingnew

opportunitiestochangedemocracyitself—howgovernmentscanbemoreopen

andfreefromlobbyistcontrol,andbehavewiththefourvaluesofintegrity.We

lookathowblockchaintechnologiescanchangewhatitmeanstobeacitizen

andparticipateinthepoliticalprocess,fromvotingandaccessingsocialservices

tosolvingsomeofsociety’sbighairyproblemsandholdingelected

representativesaccountableforthepromisesthatgotthemelected.

PROMISEANDPERILOFTHENEWPLATFORM

Iftherearesixmillionpeopleinthenakedcity,

thentherearesixmillion

obstaclestothistechnologyfulfillingitspotential.Further,therearesome

worrisomedownsides.Somesaythetechnologyisnotreadyforprimetime;that

it’sstillhardtouse,andthatthekillerapplicationsarenascent.Othercritics

pointtothemassiveamountofenergyconsumedtoreachconsensusinjustthe

bitcoinnetwork:Whathappenswhenthousandsorperhapsmillionsof

interconnectedblockchainsareeachprocessingbillionsoftransactionsaday?

Aretheincentivesgreatenoughforpeopletoparticipateandbehavesafelyover

time,andnottrytooverpowerthenetwork?Isblockchaintechnologytheworst

jobkillerever?

Thesearequestionsofleadershipandgovernance,notoftechnology.The

firsteraoftheInternettookoffbecauseofthevisionandcommoninterestsofits

keystakeholders—governments,civilsocietyorganizations,developers,and

everydaypeoplelikeyou.Blockchainrequiressimilarleadership.Wediscussat

greaterlengthinthebookwhyleadersofthisnewdistributedparadigmwill

needtostaketheirclaimandunleashawaveofeconomicandinstitutional

innovation,toensurethistimethatthepromiseisfulfilled.Weinviteyoutobe

oneofthese.

Thisbookgrewoutofthe$4millionGlobalSolutionNetworksprogramat

theRotmanSchoolofManagementattheUniversityofToronto.Funded

primarilybylargetechnologycorporationsalongwiththeRockefellerandSkoll

foundations,theU.S.StateDepartment,andIndustryCanada,theinitiative

explorednewapproachestoglobalproblemsolvingandgovernance.Wewere

bothinvolvedinrunningtheprogram.(Donfoundedit;Alexledtheprojecton

cryptocurrencies.)In2014,welaunchedaone-yearinitiativeontheblockchain

revolutionanditsimplicationsforbusinessandsociety,culminatinginthisbook.

Init,wehaveattemptedtoputthepromiseandtheperilofthenewplatforminto

perspective.

Ifbusiness,government,andcivilsocietyinnovatorsgetthisright,wewill

movefromanInternetdrivenprimarilybythefallingcostsofsearch,

coordination,datacollection,anddecisionmaking—wherethenameofthegame

wasmonitoring,mediating,andmonetizinginformationandtransactionsonthe

Web—toonedrivenbythefallingcostsofbargaining,policing,andenforcing

socialandcommercialagreements,wherethenameofthegamewillbeintegrity,

security,collaboration,theprivacyofalltransactions,andthecreationand

distributionofvalue.That’sa180-degreeturninstrategy.Theresultcanbean

economyofpeerswithinstitutionsthataretrulydistributed,inclusive,and

empowering—andtherebylegitimate.Byfundamentallychangingwhatwecan

doonline,howwedoit,andwhocanparticipate,thenewplatformmayeven

createthetechnologicalpreconditionstoreconcilingsomeofourmostvexing

socialandeconomicchallenges.

Ifwegetthiswrong,blockchaintechnology,whichholdssomuchpromise,

willbeconstrainedorevencrushed.Worse,itcouldbecomeatoolpowerful

institutionsusetoentrenchtheirwealthor,ifhackedbygovernments,aplatform

forsomekindofnewsurveillancesociety.Thetightlyrelatedtechnologiesof

distributedsoftware,cryptography,autonomousagents,andevenartificial

intelligencecouldgetoutofcontrolandturnagainsttheirhumanprogenitors.

Itispossiblethatthisnewtechnologymaybedelayed,stalled,underutilized,

orworse.Theblockchainandcryptocurrencies,particularlybitcoin,alreadyhave

massivemomentum,butwe’renotpredictingwhetherornotallthiswill

succeed,andifitdoes,howfastitwilloccur.

Predictionisalwaysarisky

business.SaystechnologytheoristDavidTicoll:“Manyofusdidabadjobof

predictingthefullimpactoftheInternet.ISIStypebadphenomenaareamong

whatwemissed,andsomebigoptimisticpredictionsturnedoutwrong.”He

says,“IftheblockchainisasbiganduniversalastheNet,wearelikelytodoa

comparablybadjobofpredictingbothitsupsidesanddownsides.”

Soratherthanpredictingablockchainfuture,we’readvocatingforit.We’re

arguingthatitshouldsucceed,becauseitcouldhelpususherinaneweraof

prosperity.Webelievethattheeconomyworksbestwhenitworksforeveryone,

andthisnewplatformisanengineofinclusion.Itdrasticallylowersthecostof

transmittingsuchfundsasremittances.Itsignificantlylowersthebarrierto

havingabankaccount,obtainingcredit,andinvesting.Anditsupports

entrepreneurshipandparticipationinglobaltrade.Itcatalyzesdistributed

capitalism,notjustaredistributedcapitalism.

Everyoneshouldstopfightingitandtaketherightstepstogetonboard.

Let’sharnessthisforcenotfortheimmediatebenefitofthefewbutforthe

lastingbenefitofthemany.

Today,bothofusareexcitedaboutthepotentialofthisnextroundofthe

Internet.We’reenthusiasticaboutthemassivewaveofinnovationthatisbeing

unleashedanditspotentialforprosperityandabetterworld.Thisbookisour

casetoyoutobecomeinterested,understandthisnextwave,andtakeactionto

ensurethatthepromiseisfulfilled.

Sohangontoyourseatandreadon!We’reatoneofthosecriticaljunctures

inhumanhistory.

CHAPTER2



BOOTSTRAPPINGTHEFUTURE:

SEVENDESIGNPRINCIPLESOFTHE

BLOCKCHAINECONOMY

reedomispredicatedonprivacy,”saidAnnCavoukian,executivedirectorof

thePrivacyandBigDataInstituteatRyersonUniversity.“Ifirstlearnedthat

thirtyyearsagowhenIstartedgoingtoconferencesinGermany.Itisnoaccident

thatGermanyistheleadingprivacyanddataprotectioncountryintheworld.

TheyhadtoenduretheabusesoftheThirdReichandthecompletecessationof

alloftheirfreedoms,whichstartedwiththecompleteremovaloftheirprivacy.

Whenthatended,theysaid,‘Neveragain.’”

Andsoitisironic—ortotallyfitting—thatoneofthefirstdecentralized

peer-to-peercomputationalplatformstoguaranteeuserprivacyiscalledEnigma,

alsothenamegiventothemachinedevelopedbyGermanengineerArthur

Scherbiustotranscribecodedinformation.ScherbiusdesignedEnigmafor

commercialuse:throughhisdevice,globalcompaniescouldquicklyandsafely

communicatetheirtradesecrets,stocktips,andotherinsiderinformation.Within

afewyears,Germany’smilitaryforcesweremanufacturingtheirownversions

ofEnigmatobroadcastcodedmessagesoverradiototroops.Duringthewar,the

NazisusedEnigmatodisseminatestrategicplans,detailsoftargets,andthe

timingofattacks.Itwasatoolofsufferingandoppression.

OurcontemporaryEnigmaisatooloffreedomandprosperity.Designedat

MITMediaLabbyGuyZyskindandOzNathan,thenewEnigmacombinesthe

virtuesofblockchain’spublicledger,thetransparencyofwhich“providesstrong

incentivesforhonestbehavior,”withsomethingknownashomomorphic

encryptionandsecuremultipartycomputation.

Moresimplyput,“Enigmatakes

yourinformation—anyinformation—breaksitup,andencryptsitintopiecesof

datathatarerandomlydistributedtonodesinthenetwork.Itdoesn’texistinone

spot,”saidCavoukian.“Enigmausesblockchaintechnologytoembedthedata

andtrackallthepiecesofinformation.”

Youcanshareitwiththirdpartiesand

thosepartiescanuseitincomputationswithouteverdecryptingit.

Ifitworks,it

couldreshapehowweapproachourownidentityonline.Imaginehavingablack

boxofyourpersonalinformationthatyoualonecontrolandcanaccess.

Nomatterhowcoolitmaysound,therearereasonstotreadcautiouslyon

thecryptographicfrontier.First,itneedstobootstrapalargenetworkof

participants.Second,“cryptographyisanareawhereyouneverwanttobeusing

thenewestandgreatest,becausethereisanentirehistoryofanalgorithmthat

everyonebelievesissecure,that’soutthereforfourorfiveyears,andsomevery

inspiredscientistwillcomeoutandsay,there’saflaw,andtheentirething

tumbles,”saidAustinHillofBlockstream.“That’swhywegenerallyprefer

conservative,verywell-established,long-standingalgorithms.Thisstuffisvery,

verywellfuture-proofed,andbitcoinwasdesignedwiththatinmind.”

Still,theconceptisworthtakingveryseriously,asithasprofound

implicationsforprivacy,security,andsustainability.“Enigmaisofferingwhat

theysayguaranteesprivacy,”Cavoukiansaid.“Thatisabigclaim,butthat’sthe

kindofthingweincreasinglyneedinthisconnected,interconnectedworld.”

Inourresearch,wecameacrossanumberofprojectsinitiatedonblockchain

technologieswhosedevelopershadsimilaraspirationsforenablingbasichuman

rights—notonlytherightstoprivacyandsecurity,butalsotherightstoproperty,

recognitionasapersonunderthelaw,andparticipationingovernment,culture,

andtheeconomy.Imagineatechnologythatcouldpreserveourfreedomto

chooseforourselvesandourfamilies,toexpressthesechoicesintheworld,and

tocontrolourowndestiny,nomatterwherewelivedorwereborn.Whatnew

toolsandnewjobscouldwecreatewiththosecapabilities?Whatnewbusinesses

andservices?Howshouldwethinkabouttheopportunities?Theanswerswere

rightinfrontofus,complimentsofSatoshiNakamoto.

THESEVENDESIGNPRINCIPLES

WebelievethatthisnexteracouldbeinspiredbySatoshiNakamoto’svision,

designedaroundasetofimplicitprinciples,andrealizedbythecollaborative

spiritofmanypassionateandequallytalentedleadersinthecommunity.

Hisgrandvisionwaslimitedtomoney,nottosomegreatergoalofcreatinga

secondgenerationoftheInternet.Therewasnodiscussionofreinventingthe

firm,changingourinstitutions,ortransformingcivilizationforthebetter.Still,

Satoshi’svisionwasstunninginitssimplicity,originality,andinsightinto

humankind.Itbecamecleartothosewhoreadthe2008paperthataneweraof

thedigitaleconomywasabouttobegin.Wherethefirsteraofthedigital

economywassparkedbyaconvergenceofcomputingandcommunications

technologies,thisseconderawouldbepoweredbyaclevercombinationof

computerengineering,mathematics,cryptography,andbehavioraleconomics.

FolksingerGordonLightfootcrooned,“Ifyoucouldreadmymind,love,

whatatalemythoughtscouldtell.”Satoshihasbeenincommunicadosince2011

(thoughthenamepopsupondiscussionboardsfromtimetotime),butwethink

thetrustprotocolhebootstrappedlendsitselftoprinciplesforreconfiguringour

institutionsandeconomy.

Everyonewetalkedtohasbeeneagertoshareinsightsintoblockchain

technologywithus.Eachconversation,eachwhitepaper,eachforumthreadhas

surfacedanumberofthemesthatwe’vereverse-engineeredintodesign

principles—principlesforcreatingsoftware,services,businessmodels,markets,

organizations,andevengovernmentsontheblockchain.Satoshineverwrote

abouttheseprinciples,buttheyareimplicitinthetechnologyplatformhe

unleashed.Weseethemasprinciplesforshapingthenexteraofthedigital

economy,andaneraofrenewedtrust.

Ifyou’renewtothisspace,wehopetheseprincipleswillhelpyou

understandthebasicsoftheblockchainrevolution.Ifyou’readie-hardskeptic

ofthebitcoinblockchain,theyshouldstillserveyouasyoucontemplateyour

futureasanentrepreneur,inventor,engineer,orartistwhoseekscreative

collaborationswithlike-mindedpeople;asanownerorinvestorinassetsofall

kinds;orasamanagerwhowantstoreimagineyourroleinthisnascent

blockchaineconomy.

1.NetworkedIntegrity

Principle:Trustisintrinsic,notextrinsic.Integrityisencodedineverystepof

theprocessanddistributed,notvestedinanysinglemember.Participantscan

exchangevaluedirectlywiththeexpectationthattheotherpartywillactwith

integrity.Thatmeansthatthevaluesofintegrity—honestyinone’swordsand

deeds,considerationforothers’interests,accountabilityfortheconsequencesof

one’sdecisionsandactions,andtransparencyindecisionmakingandaction

taking—arecodedindecisionrights,incentivestructures,andoperationssothat

actingwithoutintegrityeitherisimpossibleorcostsalotmoretime,money,

energy,andreputation.

ProblemtoBeSolved:OntheInternet,peoplehaven’tbeenabletotransact

ordobusinessdirectlyforthesimplereasonthatmoneyisn’tlikeother

informationgoodsandintellectualpropertyperse.Youcansendthesameselfie

toallyourfriends,butyououghtnotgiveyourfriendadollarthatyou’ve

alreadygiventosomeoneelse.Themoneymustleaveyouraccountandgointo

yourfriend’s.Itcan’texistinbothplaces,letalonemultipleplaces.Andso

there’sariskofyourspendingaunitofdigitalcurrencyintwoplacesandhaving

oneofthembouncelikeabadcheck.That’scalledthedouble-spendproblem.

That’sgoodforfraudsterswhowanttospendtheirmoneytwice.It’sbadforthe

recipientofthebouncedamountandbadforyourreputationonline.

Traditionally,whenmakingonlinepayments,wesolvethedouble-spend

problembyclearingeverytransactionthroughthecentraldatabasesofoneor

manythirdparties,suchasamoneytransferservice(likeWesternUnion),a

commercialbank(Citicorp),agovernmentbody(CommonwealthBankof

Australia),acreditcardcompany(Visa),oranonlinepaymentplatform

(PayPal).Settlementcantakedaysorevenweeksinsomepartsoftheworld.

Breakthrough:Satoshileveragedanexistingdistributedpeer-to-peer

networkandabitofclevercryptographytocreateaconsensusmechanismthat

couldsolvethedouble-spendproblemaswellas,ifnotbetterthan,atrusted

thirdparty.Onthebitcoinblockchain,thenetworktime-stampsthefirst

transactionwheretheownerspendsaparticularcoinandrejectssubsequent

spendsofthecoin,thuseliminatingadoublespend.Networkparticipantswho

runfullyoperatingbitcoinnodes—calledminers—gatheruprecenttransactions,

settlethemintheformofablockofdata,andrepeattheprocesseveryten

minutes.Eachblockmustrefertotheprecedingblocktobevalid.Theprotocols

alsoincludeamethodforreclaimingdiskspacesothatallnodescanefficiently

storethefullblockchain.Finally,theblockchainispublic.Anyonecansee

transactionstakingplace.Noonecanhideatransaction,andthatmakesbitcoin

moretraceablethancash.

Satoshisoughtnotonlytodisintermediatethecentralbankingpowersbut

alsotoeliminatetheambiguityandconflictinginterpretationsofwhathappened.

Letthecodespeakforitself.Letthenetworkreachconsensusalgorithmicallyon

whathappenedandrecorditcryptographicallyontheblockchain.The

mechanismforreachingconsensusiscritical.“Consensusisasocialprocess,”

bloggedVitalikButerin,pioneeroftheEthereumblockchain.“Humanbeingsare

fairlygoodatengaginginconsensus...withoutanyhelpfromalgorithms.”He

explainedthat,onceasystemscalesbeyondanindividual’sabilitytodothe

math,peopleturntosoftwareagents.Inpeer-to-peernetworks,theconsensus

algorithmdivviesuptherighttoupdatethestatusofthenetwork,thatis,tovote

onthetruth.Thealgorithmdolesoutthisrighttoagroupofpeerswhoconstitute

aneconomicset,asetthathasskininthegame,sotospeak.Accordingto

Buterin,what’simportantaboutthiseconomicsetisthatitsmembersare

securelydistributed:nosinglememberorcartelshouldbeabletoovertakea

majority,eveniftheyhadthemeansandincentivetodoso.

Toachieveconsensus,thebitcoinnetworkuseswhat’scalledaproofofwork

(PoW)mechanism.Thismaysoundcomplicatedbuttheideaisasimpleone.

Becausewecan’trelyontheidentityoftheminerstoselectwhocreatesthenext

block,weinsteadcreateapuzzlethatishardtosolve(i.e.,ittakesalotofwork),

buteasytoverify(i.e.,everyoneelsecanchecktheanswerveryquickly).

Participantsagreethatwhoeversolvestheproblemfirstgetstocreatethenext

block.Minershavetoexpendresources(computinghardwareandelectricity)to

solvethepuzzlebyfindingtherighthash,akindofuniquefingerprintforatext

oradatafile.Foreachblocktheyfind,minersreceivebitcoinasareward.The

puzzleismathematicallysetuptomakeitimpossibletofindashortcuttosolve

it.That’swhy,whentherestofthenetworkseestheanswer,everyonetruststhat

alotofworkwentintoproducingit.Also,thispuzzlesolvingiscontinuous“to

thetuneof500,000trillionhashespersecond,”accordingtoDinoMark

Angaritis.Minersare“lookingforahashthatmeetsthetarget.Itisstatistically

boundtooccureverytenminutes.It’saPoissonprocess,sothatsometimesit

takesoneminuteandsometimesonehour,butonaverage,it’stenminutes.”

Angaritisexplainedhowitworks:“Minersgatherallthependingtransactions

thattheyfindonthenetworkandrunthedatathroughacryptographicdigest

functioncalledthesecurehashalgorithm(SHA-256),whichoutputsa32-byte

hashvalue.Ifthehashvalueisbelowacertaintarget(setbythenetworkand

adjustedevery2,016blocks),thentheminerhasfoundtheanswertothepuzzle

andhas‘solved’theblock.Unfortunatelyfortheminer,findingtherighthash

valueisverydifficult.Ifthehashvalueiswrong,themineradjuststheinputdata

slightlyandtriesagain.Eachattemptresultsinanentirelydifferenthashvalue.

Minershavetotrymanytimestofindtherightanswer.AsofNovember2015,

thenumberofhashattemptsisonaverage350milliontrillion.That’salotof

work!”

Youmayhearaboutotherconsensusmechanisms.Thefirstversionofthe

Ethereumblockchain—Frontier—alsousesproofofwork,butthedevelopersof

Ethereum1.1expecttoreplaceitwithaproofofstakemechanism.Proofof

stakerequiresminerstoinvestinandhangontosomestoreofvalue(i.e.,the

nativetokenoftheblockchainsuchasPeercoin,NXT,etc.).Theyneedn’tspend

energytovote.Otherblockchains,suchasRippleandStellar,relyonsocial

networksforconsensusandmayrecommendthatnewparticipants(i.e.,new

nodes)generateauniquenodelistofatleastonehundrednodestheycantrustin

votingonthestateofaffairs.Thistypeofproofisbiased:newcomersneedsocial

intelligenceandreputationtoparticipate.Proofofactivityisanothermechanism;

itcombinesproofofworkandproofofstake,wherearandomnumberofminers

mustsignoffontheblockusingacryptokeybeforetheblockbecomesofficial.

Proofofcapacityrequiresminerstoallotasizablevolumeoftheirharddriveto

mining.Asimilarconcept,proofofstorage,requiresminerstoallocateandshare

diskspaceinadistributedcloud.

Storagedoesmatter.Dataonblockchainsaredifferentfromdataonthe

Internetinoneimportantway.OntheInternet,mostoftheinformationis

malleableandfleeting,andtheexactdateandtimeofitspublicationisn’tcritical

topastorfutureinformation.Ontheblockchain,bitcoinmovementacrossthe

networkispermanentlystamped,fromthemomentofitscoinage.Forabitcoin

tobevalid,itmustreferenceitsownhistoryaswellasthehistoryofthe

blockchain.Therefore,theblockchainmustbepreservedinitsentirety.

Soimportantaretheprocessesofmining—assemblingablockof

transactions,spendingsomeresource,solvingtheproblem,reachingconsensus,

maintainingacopyofthefullledger—thatsomehavecalledthebitcoin

blockchainapublicutilityliketheInternet,autilitythatrequirespublicsupport.

PaulBrodyofErnst&Youngthinksthatallourappliancesshoulddonatetheir

processingpowertotheupkeepofablockchain:“Yourlawnmoweror

dishwasherisgoingtocomewithaCPUthatisprobablyathousandtimesmore

powerfulthanitactuallyneeds,andsowhynothaveitmine?Notforthe

purposeofmakingyoumoney,buttomaintainyourshareoftheblockchain,”

hesaid.Regardlessoftheconsensusmechanism,theblockchainensures

integritythroughclevercoderatherthanthroughhumanbeingswhochooseto

dotherightthing.

ImplicationsfortheBlockchainEconomy:Ratherthantrustingbig

companiesandgovernmentstoverifypeople’sidentitiesandvouchfortheir

reputations,wecantrustthenetwork.Forthefirsttimeever,wehaveaplatform

thatensurestrustintransactionsandmuchrecordedinformationnomatterhow

theotherpartyacts.

Theimplicationsformostsocial,political,andeconomicactivityare

staggering.It’snotjustaboutwhomarriedwhom,whovotedforwhom,who

paidwhom,it’saboutanyendeavorthatrequirestrustedrecordsandassured

transactions.Whoownswhat?Whoholdswhichrightstothisintellectual

property?Whograduatedfrommedicalschool?Whoboughtguns?Whomade

theseNikeshoes,thisAppledevice,orthisbabyformula?Wheredidthese

diamondscomefrom?Trustisthesinequanonofthedigitaleconomy,anda

platformforsecureandreliablemasscollaborationholdsmanypossibilitiesfora

newkindoforganizationandsociety.

2.DistributedPower

Principle:Thesystemdistributespoweracrossapeer-to-peernetworkwithno

singlepointofcontrol.Nosinglepartycanshutthesystemdown.Ifacentral

authoritymanagestoblackoutorcutoffanindividualorgroup,thesystemwill

stillsurvive.Ifoverhalfthenetworkattemptstooverwhelmthewhole,everyone

willseewhat’shappening.

ProblemtoBeSolved:InthefirsteraoftheInternet,anylargeinstitution

withalargeestablishedbaseofusers,betheyemployees,citizens,customers,or

otherorganizations,thoughtlittleoftheirsocialcontract.Timeandtimeagain,

centralpowershaveproventhatthey’rewillingandabletooverrideusers,

warehouseandanalyzeuserdata,respondtogovernmentrequestsfordata

withoutusers’knowledge,andimplementlarge-scalechangeswithoutusers’

consent.

Breakthrough:Theenergycostsofoverpoweringthebitcoinblockchain

wouldoutweighthefinancialbenefits.Satoshideployedaproof-of-workmethod

thatrequiresuserstoexpendalotofcomputingpower(whichrequiresalotof

electricity)todefendthenetworkandmintnewcoins.Hewasinspiredby

cryptographerAdamBack’ssolution,Hashcash,tomitigatespamanddenial-of-

serviceattacks.Back’smethodrequirede-mailerstoprovideproofofworkwhen

sendingthemessage.Itineffectstamped“specialdelivery”onane-mailto

signalthemessage’simportancetoitssender.“Thismessageissocriticalthat

I’vespentallthisenergyinsendingittoyou.”Itincreasesthecostsofsending

spam,malware,andransomware.

Anyonecandownloadthebitcoinprotocolforfreeandmaintainacopyof

theblockchain.Itleveragesbootstrapping,atechniqueforuploadingthe

programontoavolunteer’scomputerormobiledevicethroughafewsimple

instructionsthatsettherestoftheprograminmotion.It’sfullydistributedacross

avolunteernetworklikeBitTorrent,ashareddatabaseofintellectualproperty

thatresidesontensofthousandsofcomputersworldwide.

Tobesure,thisshieldsthenetworkfromthehandsofthestate,whichcould

begoodorbaddependingonthesituation—sayadissidentinatotalitarian

countryfightingforwomen’srightsversusacriminalinademocraticcountry

conductingextortion.Totalitarianregimescouldnotfreezebankaccountsor

seizefundsofpoliticalactivists.Statescouldnotarbitrarilyseizeassetsonthe

blockchainasFranklinDelanoRoosevelt’sadministrationdidthroughFDR’s

ExecutiveOrder6102,whichrequiredcitizenstoturntheir“goldcoin,gold

bullion,andgoldcertificates”overtothegovernmentorriskfinesor

imprisonment.

JoshFairfieldofWashingtonandLeeUniversityputitbluntly:

“There’snomiddlemantogoafteranymore.”

Theblockchainresides

everywhere.Volunteersmaintainitbykeepingtheircopyoftheblockchainupto

dateandlendingtheirsparecomputerprocessingunitsformining.Nobackdoor

dealing.Everyactionortransactionisbroadcastacrossthenetworkfor

subsequentverificationandvalidation.Nothingpassesthroughacentralthird

party;nothingisstoredonacentralserver.

Satoshialsodistributedthemintbylinkingtheissuanceofbitcoinstothe

creationofanewblockintheledger,puttingthepowertomintintoallthehands

ofthepeernetwork.Whicheverminersolvedthepuzzleandsubmittedproofof

workfirstcouldreceiveanumberofnewbitcoins.ThereisnoFederalReserve,

centralbank,ortreasurywithcontroloverthemoneysupply.Moreover,each

bitcoincontainsdirectlinkstoitsgenesisblockandallsubsequenttransactions.

Sonointermediariesarerequired.Thefunctioningoftheblockchainismass

collaborationatitsbest.Youhavepoweroveryourdata,yourproperty,andyour

levelofparticipation.It’sdistributedcomputingpowerenablingdistributedand

collectivehumanpower.

ImplicationsfortheBlockchainEconomy:Perhapssuchaplatformcould

enablenewdistributedmodelsofwealthcreation.Perhapsnewkindsofpeer-to-

peercollaborationscouldtargethumanity’smostvexingsocialproblems.

Perhapswecouldsolvethecrisisofconfidenceandevenlegitimacyintoday’s

institutionsbyshiftingrealpowertowardcitizens,equippingthemwithreal

opportunitiesforprosperityandparticipationinsociety,ratherthanthroughPR

trickery.

3.ValueasIncentive

Principle:Thesystemalignstheincentivesofallstakeholders.Bitcoinorsome

tokenofvalueisintegraltothisalignmentandcorrelativeofreputation.Satoshi

programmedthesoftwaretorewardthosewhoworkonitandbelongtothose

whoholdanduseitstokens,sothattheyalltakecareofit.Sortoftheultimate

Tamagotchi,theblockchainisagloballydistributednestegg.

ProblemtoBeSolved:InthefirsteraoftheInternet,theconcentrationof

powerincorporations,combinedwiththeirsheersize,complexity,andopacity,

enabledthemtoextractdisproportionatevaluefromtheverynetworksthat

endowedthemwithrights.Largebanksexploitedthefinancialsystemtoits

breakingpointbecause“incentivestructuresformostofthetopexecutivesand

manyofthelendingofficersofthesebanks[were]designedtoencourageshort-

sightedbehaviorandexcessiverisk-taking,”accordingtoeconomistJoseph

Stiglitz.Thatincluded“preyingonthepoorestAmericans.”Hesummedupthe

problem:“Ifyougivepeoplebadincentives,theybehavebadly,andthey

behavedjustasonewouldhaveexpected.”

Largedot-comsdangledfreeservicesinretail,search,andsocialmediain

exchangeforuserdata.AccordingtoanErnst&Youngsurvey,nearlytwothirds

ofmanagerspolledsaidtheycollectedconsumerdatatodrivebusiness,and

nearly80percentclaimedtohaveincreasedrevenuesfromthisdatamining.But

whenthesefirmsgethacked,it’stheconsumerswhohavetocleanupthemess

ofstolencreditcardandbankaccountinformation.It’snotsurprisingthat,inthe

samesurvey,nearlyhalfofconsumerssaidthey’dbecuttingoffaccesstotheir

datainthenextfiveyears,andoverhalfsaidtheywerealreadyprovidingless

data,includingcensoringthemselvesonsocialmedia,thaninthepreviousfive

years.

Breakthrough:Satoshiexpectedparticipantstoactintheirownself-

interests.Heunderstoodgametheory.Heknewthatnetworkswithout

gatekeepershavebeenvulnerabletoSybilattacks,wherenodesforgemultiple

identities,diluterights,anddepreciatethevalueofreputation.

Theintegrityof

thepeer-to-peernetworkandthereputationofitspeersbothdiminishifyou

don’tknowwhetheryou’redealingwiththreepartiesoronepartyusingthree

identities.SoSatoshiprogrammedthesourcecodesothat,nomatterhow

selfishlypeopleacted,theiractionswouldbenefitthesystemoverallandaccrue

totheirreputations,howevertheychosetoidentifythemselves.Theresource

requirementsoftheconsensusmechanism,combinedwithbitcoinsasreward,

couldcompelparticipantstodotherightthing,makingthemtrustworthyinthe

sensethattheywerepredictable.Sybilattackswouldbeeconomicallyunviable.

Satoshiwrote,“Byconvention,thefirsttransactioninablockisaspecial

transactionthatstartsanewcoinownedbythecreatoroftheblock.Thisaddsan

incentivefornodestosupportthenetwork.”

Bitcoinisanincentiveforminers

toparticipateincreatingablockandlinkingittothepreviousblock.Thosewho

completeablockfirstgetaquantityofbitcoinsfortheirefforts.Satoshi’s

protocolrewardedearlyadoptershandsomelywithbitcoin:forthefirstfour

years,minersreceived50bitcoins(BTC)foreachblock.Everyfouryears,the

rewardperblockwouldhalve:25BTC,12.5BTC,andsoon.Becausetheynow

ownbitcoin,theyhaveanincentivetoensuretheplatform’slong-termsuccess,

buyingthebestequipmenttorunminingoperations,spendingenergyas

efficientlyaspossible,andmaintainingtheledger.Bitcoinisalsoaclaimonthe

blockchain,notjustasanincentivetoparticipateinminingandtransactingwith

othersbutthroughownershipintheplatformitself.Distributeduseraccountsare

themostbasicelementofthecryptographicnetworkinfrastructure.Byowning

andusingbitcoin,oneisfinancingtheblockchain’sdevelopment.

Satoshichoseastheeconomicsettheownersofcomputingpower.This

requirestheseminerstoconsumearesourceexternaltothenetwork,namely

electricity,iftheywanttoparticipateintherewardsystem.Everysooften,

differentminersfindtwoequallyvalidblocksofequalheight,andtherestofthe

minersmustchoosewhichblocktobuildonnext.Theygenerallypick

whichevertheythinkwillwinratherthanbuildingonboth,becausethey’d

otherwisehavetosplittheirprocessingpowerbetweentheforks,andthat’sa

strategyforlosingvalue.Thelongestchainrepresentsthegreatestamountof

workandthereforeparticipantschooseitasthecanonicalstateofthe

blockchain.Incontrast,Ethereumchoseownersofcoinasitseconomicset.

RippleandStellarchosethesocialnetwork.

Theparadoxoftheseconsensusschemesisthatbyactinginone’sself-

interest,oneisservingthepeer-to-peer(P2P)network,andthatinturnaffects

one’sreputationasamemberoftheeconomicset.Beforeblockchain

technologies,peoplecouldn’teasilyleveragethevalueoftheirreputationonline.

Itwasn’tonlybecauseofSybilattacks,whereacomputercouldinhabitmultiple

roles.Identityismultifaceted,nuanced,andtransient.Fewpeopleseeallsides,

letalonethesubtletiesandthearcofouridentity.Fordifferentcontexts,wehave

toproducesomedocumentorothertoattesttosomedetailofouridentity.

People“withoutpapers”areconfinedtocollaboratingwiththeirsocialcircle.On

blockchainslikeStellar,that’sanexcellentstart,ameansofcreatingapersistent

digitalpresenceandestablishingreputationthatisportablewellbeyondone’s

geographiccommunity.

Anotherbreakthroughtopreservevalueisthemonetarypolicyprogrammed

intothesoftware.“Allmoneymankindhaseverusedhasbeeninsecureinone

wayoranother,”saidNickSzabo.“Thisinsecurityhasbeenmanifestedina

widevarietyofways,fromcounterfeitingtotheft,butthemostperniciousof

whichhasprobablybeeninflation.”

Satoshicappedthesupplyofbitcoinsat21

milliontobeissuedovertimetopreventarbitraryinflation.Giventhehalving

everyfouryearsofbitcoinsminedinablockandthecurrentrateofmining—six

blocksperhour—those21millionBTCshouldbeincirculationaroundtheyear

2140.Nohyperinflationorcurrencydevaluationcausedbyincompetentor

corruptbureaucracies.

Currenciesarenottheonlyassetsthatwecantradeontheblockchain.

“We’veonlybeguntoscratchthesurfaceonwhat’spossible,”saidHillof

Blockstream.“We’restillatthat1994pointintermsofapplicationsand

protocolsthatreallytakeadvantageofthenetworkandshowtheworld,‘Here’s

whatyoucandothatistotallygroundbreaking.’”

Hillexpectstoseedifferent

financialinstruments,fromproof-of-assetauthenticitytoproof-of-property

ownership.HealsoexpectstoseebitcoinapplicationsintheMetaverse(avirtual

world)whereyoucanconvertbitcoinintoKongbucksandhireHiroProtagonist

tohackyousomedata.

OrjackyourselfintotheOASIS(aworldofmultiple

virtualutopias)whereyouactuallydodiscovertheEasteregg,winHalliday’s

estate,licenseOASIS’svirtualpositioningrightstoGoogle,andbuyaself-

drivingcartonavigateToronto.

And,ofcourse,there’stheInternetofThings,whereweregisterourdevices,

assignthemanidentity(Intelisalreadydoingthis),andcoordinatepayment

amongthemusingbitcoinratherthanmultiplefiatcurrencies.“Youcandefine

allthesenewbusinesscasesthatyouwanttodo,andhaveitinteroperatewithin

thenetwork,andusethenetworkinfrastructurewithouthavingtobootstrapa

newblockchain,justforyourself,”saidHill.

Unlikefiatcurrency,eachbitcoinisdivisibletoeightdecimalplaces.It

enablesuserstocombineandsplitvalueovertimeinasingletransaction,

meaningthataninputcanhavemultipleoutputsovermultipleperiodsoftime,

whichisfarmoreefficientthanaseriesoftransactions.Userscansetupsmart

contractstometerusageofaserviceandmaketinyfractionsofpaymentsat

regularintervals.

ImplicationsfortheBlockchainEconomy:ThefirsteraoftheInternet

missedallthis.Nowwehaveaplatformwherepeopleandeventhingshave

properfinancialincentivestocollaborateeffectivelyandcreatejustabout

anything.Imagineonlinediscussiongroupswhereparticipantshavereputations

worthenhancing,inpartbecausebadbehaviorwillcostthemfinancially.Trolls

neednotapply.Imagineapeer-to-peernetworkofsolarpanelswherehome

ownersreceivereal-timecompensationontheblockchainforgenerating

sustainableenergy.Imagineanopensourcesoftwareprojectwhereacommunity

ofdeveloperscompensatessupercontributorsforacceptablecode.Imagine

there’snocountries.Itisn’thardtodo.

4.Security

Principle:Safetymeasuresareembeddedinthenetworkwithnosinglepointof

failure,andtheyprovidenotonlyconfidentiality,butalsoauthenticityand

nonrepudiationtoallactivity.Anyonewhowantstoparticipatemustuse

cryptography—optingoutisnotanoption—andtheconsequencesofreckless

behaviorareisolatedtothepersonwhobehavedrecklessly.

ProblemtoBeSolved:Hacking,identitytheft,fraud,cyberbullying,

phishing,spam,malware,ransomware—alloftheseunderminethesecurityof

theindividualinsociety.ThefirsteraoftheInternet,ratherthanbringing

transparencyandimpairingviolations,seemstohavedonelittletoincrease

securityofpersons,institutions,andeconomicactivity.TheaverageInternetuser

oftenhastorelyonflimsypasswordstoprotecte-mailandonlineaccounts

becauseserviceprovidersoremployersinsistonnothingstronger.Considerthe

typicalfinancialintermediary:itdoesn’tspecializeindevelopingsecure

technology;itspecializesinfinancialinnovation.IntheyearthatSatoshi

publishedhiswhitepaper,databreachesatsuchfinancialfirmsasBNYMellon,

Countrywide,andGEMoneyaccountedforover50percentofallidentitythefts

reportedthatyear,accordingtotheIdentityTheftResourceCenter.

By2014,

thatfigurehadfallento5.5percentforthefinancialsector,butbreachesin

medicalandhealthcarejumpedto42percentoftheyear’stotal.IBMreported

thattheaveragecostofadatabreachis$3.8million,whichmeansthatdata

breacheshavecostatleast$1.5billionoverthelasttwoyears.

Theaverage

costtoanindividualofmedicalidentityfraudiscloseto$13,500,andoffenses

areontherise.Consumersdon’tknowwhichaspectoftheirlifewillbehacked

next.

Ifthenextstageofthedigitalrevolutioninvolvescommunicatingmoney

directlybetweenparties,thencommunicationneedstobehackproof.

Breakthrough:Satoshirequiredparticipantstousepublickeyinfrastructure

(PKI)forestablishingasecureplatform.PKIisanadvancedformof

“asymmetric”cryptography,whereusersgettwokeysthatdon’tperformthe

samefunction:oneisforencryptionandonefordecryption.Hence,theyare

asymmetric.Thebitcoinblockchainisnowthelargestciviliandeploymentof

PKIintheworld,andsecondoveralltotheU.S.DepartmentofDefense

commonaccesssystem.

Pioneeredinthe1970s,

asymmetriccryptographygainedsometractionin

the1990sintheformofe-mailencryptionfreewaresuchasPrettyGoodPrivacy.

PGPisprettysecure,andprettymuchahassletousebecauseeveryoneinyour

networkneedstobeusingit,andyouhavetokeeptrackofyourtwokeysand

everyone’spublickeys.There’snopassword-resetfunction.Ifyouforgetyours,

youhavetostartallover.AccordingtotheVirtruCorporation,“theuseofemail

encryptionisontherise.Still,only50percentofemailsareencryptedintransit,

andend-to-endemailencryptionisrarerstill.”

Somepeopleusedigital

certificates,piecesofcodethatprotectmessageswithouttheencrypt-decrypt

operations,butusersmustapply(andpayanannualfee)fortheirindividual

certificates,andthemostcommone-mailservices—Google,Outlook,and

Yahoo!—don’tsupportthem.

“Pastschemesfailedbecausetheylackedincentive,andpeoplenever

appreciatedprivacyasincentiveenoughtosecurethosesystems,”

Andreas

Antonopoulossaid.Thebitcoinblockchainsolvesnearlyalltheseproblemsby

providingtheincentiveforwideadoptionofPKIforalltransactionsofvalue,

notonlythroughtheuseofbitcoinbutalsointhesharedbitcoinprotocols.We

needn’tworryaboutweakfirewalls,thievingemployees,orinsurancehackers.If

we’rebothusingbitcoin,ifwecanstoreandexchangebitcoinsecurely,thenwe

canstoreandexchangehighlyconfidentialinformationanddigitalassets

securelyontheblockchain.

Here’showitworks.Digitalcurrencyisn’tstoredinafileperse.It’s

representedbytransactionsindicatedbyacryptographichash.Usersholdthe

cryptokeystotheirownmoneyandtransactdirectlywithoneanother.Withthis

securitycomestheresponsibilityofkeepingone’sprivatekeysprivate.

Securitystandardsmatter.Thebitcoinblockchainrunsontheverywell-

knownandestablishedSHA-256publishedbytheU.S.NationalInstituteof

StandardsandTechnologyandacceptedasaU.S.FederalInformation

ProcessingStandard.Thedifficultyofthemanyrepetitionsofthismathematical

calculationrequiredtofindablocksolutionforcesthecomputationaldeviceto

consumesubstantialelectricityinordertosolveapuzzleandearnnewbitcoin.

Otheralgorithmssuchasproofofstakeburnmuchlessenergy.

RememberwhatAustinHillsaidatthestartofthischapteraboutnever

usingthenewestandgreatestinalgorithms.Hill,whoworkswithcryptographer

AdamBackatBlockstream,expressedconcernovercryptocurrenciesthatdon’t

useproofofwork.“Idon’tthinkproofofstakeultimatelyworks.Tome,it’sa

systemwheretherichgetricher,wherepeoplewhohavetokensgettodecide

whattheconsensusis,whereasproofofworkultimatelyisasystemrootedin

physics.Ireallylikethatbecauseit’sverysimilartothesystemforgold.”

Finally,thelongestchainisgenerallythesafestchain.Thesecurityof

Satoshi’sblockchainbenefitsgreatlyfromitsrelativematurityandits

establishedbaseofbitcoinusersandminers.Hackingitwouldrequiremore

computingpowerthanattackingshortchains.Hillsaid,“Wheneveroneofthese

newnetworksstartupwithanallnewchain,there’sabunchofpeoplewho

directtheirlatentcomputerpower,allthecomputersandCPUsthattheytook

offlinefromminingbitcoin,theypointatthesenewnetworkstomanipulate

themandtoessentiallyattackthenetworks.”

ImplicationsfortheBlockchainEconomy:Inthedigitalage,

technologicalsecurityisobviouslythepreconditiontosecurityofapersonin

society.Todaybitscanpassthroughourfirewallsandwallets.Thievescanpick

ourpocketsorhijackourcarsfromtheothersideoftheworld.Aseachofus

reliesmoreondigitaltoolsandplatforms,suchthreatshavemultipliedinways

thatmostofusdonotunderstand.Withthebitcoinblockchain,withitsmore

securedesignanditstransparency,wecanmaketransactionsofvalueand

protectwhathappenstoourdata.

5.Privacy

Principle:Peopleshouldcontroltheirowndata.Period.Peopleoughttohave

therighttodecidewhat,when,how,andhowmuchabouttheiridentitiestoshare

withanybodyelse.Respectingone’srighttoprivacyisnotthesameasactually

respectingone’sprivacy.Weneedtodoboth.Byeliminatingtheneedtotrust

others,Satoshieliminatedtheneedtoknowthetrueidentitiesofthoseothersin

ordertointeractwiththem.“I’vespokentomanyengineersandcomputer

scientists,andtheyalltellme—everysingleone—‘Ofcourse,wecanembed

privacyintodataarchitecture,intothedesignoftheprograms.Ofcoursewe

can,’”

saidAnnCavoukian.

ProblemtoBeSolved:Privacyisabasichumanrightandthefoundationof

freesocieties.InthelasttwentyyearsoftheInternet,centraldatabasesinboth

publicandprivatesectorshaveaccumulatedallsortsofconfidentialinformation

aboutindividualsandinstitutions,sometimeswithouttheirknowledge.

Everywherepeopleworrythatcorporationsarecreatingwhatwecouldcall

cyberclonesofthembyfrackingthedigitalworldfortheirdata.Evendemocratic

governmentsarecreatingsurveillancenations,evidencedbytherecentU.S.

NationalSecurityAgency’soverextendingitssurveillancerightsbyconducting

warrantlessspyingovertheInternet.Thesearedoubleprivacyoffenses,first

collectingandusingourdatawithoutourunderstandingorourpermission,then

notprotectingthehoneypotfromhackers.“It’sallaboutabandoningzero-sum

pursuits,either-orpropositions,win-lose,youcanhaveoneinterestortheother.

That,tome,issodated,soyesterday,andsocounterproductive,”said

Cavoukian.“Wesubstituteapositive-summodelwhichis,essentially,youcan

haveprivacyand—fillintheblank.”

Breakthrough:Satoshiinstallednoidentityrequirementforthenetwork

layeritself,meaningthatnoonehadtoprovideaname,e-mailaddress,orany

otherpersonaldatainordertodownloadandusethebitcoinsoftware.The

blockchaindoesn’tneedtoknowwhoanybodyis.(AndSatoshididn’tneedto

captureanybody’sdatatomarketotherproducts.Hisopensourcesoftwarewas

theultimateinthoughtleadershipmarketing.)That’showtheSocietyfor

WorldwideInterbankFinancialTelecommunicationworks—ifyoupayincash,

thenSWIFTdoesn’tgenerallyaskforidentification—butwe’reguessingthat

manySWIFTofficeshavecameras,andfinancialinstitutionsmustcomplywith

anti–moneylaundering/knowyourcustomer(AML/KYC)requirementstojoin

anduseSWIFT.

Additionally,theidentificationandverificationlayersareseparatefromthe

transactionlayer,meaningthatPartyAbroadcaststhetransferofbitcoinsfrom

PartyA’saddresstoPartyB’saddress.There’snoreferencetoanyone’sidentity

inthattransaction.ThenthenetworkconfirmsthatPartyAnotonlycontrolled

theamountofbitcoinspecifiedbutalsoauthorizedthetransactionbefore

recognizingPartyA’smessageas“unspenttransactionoutput”associatedwith

PartyB’saddress.OnlywhenPartyBgoestospendthatamountdoesthe

networkverifythatPartyBnowcontrolsthatbitcoin.

Comparethatwithusingcreditcards,averyidentity-centricmodel.That’s

whymillionsofpeople’saddressesandphonenumbersarestoleneverytimea

databasegetsbreached.Considerthenumberofrecordsattachedtoafewofthe

morerecentdatabreaches:T-Mobile,15millionrecords;JPMorganChase,76

million;AnthemBlueCrossBlueShield,80million;eBay,145million;Office

ofPersonnelManagement,37million;HomeDepot,56million;Target,70

million;andSony,77million;andthereweresmallerbreachesofairlines,

universities,gasandelectricutilities,andhospitalfacilities,someofourmost

preciousinfrastructureassets.

Ontheblockchain,participantscanchoosetomaintainadegreeofpersonal

anonymityinthesensethattheyneedn’tattachanyotherdetailstotheiridentity

orstorethosedetailsinacentraldatabase.Wecan’tunderscorehowhugethisis.

Therearenohoneypotsofpersonaldataontheblockchain.Theblockchain

protocolsallowustochoosethelevelofprivacywe’recomfortablewithinany

giventransactionorenvironment.Ithelpsustobettermanageouridentitiesand

ourinteractionwiththeworld.

Astart-upcalledPersonalBlackBoxCompany,LLC,isaimingtohelplarge

corporationstransformtheirrelationshiptoconsumerdata.PBB’schief

marketingofficer,HalukKulin,toldus,“CompaniessuchasUnileveror

Prudentialarecomingtousandsaying,‘We’reveryinterestedinbuildingbetter

datarelationships.Canweleverageyourplatform?We’reveryinterestedin

reducingourdataliability.’They’reseeingthatdataisincreasinglyatoxicasset

insideofcorporations.”

Itsplatformgivesclientsaccesstoanonymousdata—

muchlikeaclinicaltrial,wherepharmaceuticalsknowonlytherelevantaspects

ofpatients’health—withouttakingonanydatasecurityrisk.Someconsumers

maygiveawaymoreinformationinexchangeforbitcoinsorothercorporate

benefits.Onthebackend,PBB’splatformdeploysPKIsothatonlyconsumers

haveaccesstotheirdatathroughtheirprivatekeys.NotevenPBBhasaccessto

consumerdata.

Theblockchainoffersaplatformfordoingsomeveryflexibleformsof

selectiveandanonymousattestation.AustinHilllikenedittotheInternet.“A

TCP/IPaddressisnotidentifiedtoapublicID.Thenetworklayeritselfdoesn’t

know.AnyonecanjointheInternet,getanIPaddress,andstartsendingand

receivingpacketsfreelyaroundtheworld.Asasociety,we’veseenanincredible

benefitallowingthatlevelofpseudonymity....Bitcoinoperatesalmostexactly

likethis.Thenetworkitselfdoesnotenforceidentity.That’sagoodthingfor

societyandforpropernetworkdesign.”

Sowhiletheblockchainispublic—anyonecanviewitatanytimebecauseit

residesonthenetwork,notwithinacentralizedinstitutionchargedwithauditing

transactionsandkeepingrecords—users’identitiesarepseudonymous.This

meansthatyouhavetodoaconsiderableamountoftriangulatingofdatato

figureoutwhoorwhatownsaparticularpublickey.Thesendercanprovide

onlythemetadatathattherecipientneedstoknow.Moreover,anyonecanown

multiplepublic/privatekeysets,justasanyonecanhavemultipledevicesor

accesspointstotheInternetandmultiplee-mailaddressesundervarious

pseudonyms.

Thatsaid,InternetserviceproviderslikeTimeWarnerthatassignIP

addressesdokeeprecordslinkingidentitiestoaccounts.Likewise,ifyougeta

bitcoinwalletfromalicensedonlineexchangesuchasCoinbase,thatexchange

isrequiredtodoitsduediligenceunderAML/KYCrequirements.Forexample,

hereisCoinbase’sprivacypolicy:“Wecollectinformationsenttousthrough

yourcomputer,mobilephone,orotheraccessdevice.Thisinformationmay

includeyourIPaddress,deviceinformationincluding,butnotlimitedto,

identifier,devicenameandtype,operatingsystem,location,mobilenetwork

informationandstandardwebloginformation,suchasyourbrowsertype,traffic

toandfromoursiteandthepagesyouaccessedonourwebsite.”

So

governmentscansubpoenaISPsandexchangesforthistypeofuserdata.But

theycan’tsubpoenatheblockchain.

It’salsoimportanttoknowthatwecandesignhigherlevelsoftransparency

intoanysetoftransactions,application,orbusinessmodel,shouldallthe

stakeholdersagreetodoso.Invaryingsituationswewillseenewcapabilities

whereradicaltransparencymakesalotofsense.Whencompaniestellthetruth

tocustomers,shareholders,orbusinesspartners,theybuildtrust.

Thatis,

privacyforindividuals,transparencyfororganizations,institutions,andpublic

officials.

ImplicationsfortheBlockchainEconomy:Tobesure,theblockchain

providesopportunitiestostopthestampedetoasurveillancesociety.Nowthink

abouttheproblemofcorporatebigdataforeachofus.Whatdoesitmeanfora

corporationtohaveperfectinformationaboutyou?Wearesometwentyyears

intotheglobalInternetera,andonlyatthebeginningofcorporateaccesstothe

mostintimatedetailsofourpersonallives.Comingupfastarepersonalhealth

andfitnessdata,ourdailycomingsandgoings,theinnerlivesofourhomes,and,

well,younameit.Manypeoplearesimplyunawareofthemanymicro-Faustian

dealstheymakeonlineeveryday.BysimplyusingWebsites,consumers

authorizetheirownerstoconverttrailsofdigitalcrumbsintodetailedroadmaps

forprivatecommercialbenefit.

Unlessweshifttothenewparadigm,it’snotsciencefictiontoforesee

hundredsofmillionsofavatarshummingawayintomorrow’sdatacenters.With

blockchaintechnology,youcouldownyourpersonalavatarsasyoudointhe

SecondLifevirtualworld,butwithreal-worldimplications.TheVirtualYou

couldprotectyourpersonalinformation,givingawayonlytheinformation

requiredinanysocialoreconomicexchangeworkunderyourcommandand

makesureyoureceivecompensationforanyofyourdatathathasvalueto

anotherparty.It’sashiftfrombigdatatoprivatedata.Callit“littledata.”

6.RightsPreserved

Principle:Ownershiprightsaretransparentandenforceable.Individual

freedomsarerecognizedandrespected.Weholdthistruthtobeself-evident—

thatallofusarebornwithcertaininalienablerightsthatshouldandcanbe

protected.

ProblemtoBeSolved:Thefirsteraofthedigitaleconomywasabout

findingwaystoexercisetheserightsmoreefficiently.TheInternetbecamea

mediumfornewformsofart,news,andentertainment,forestablishing

WecouldapplytheUniformCommercialCodefurthertodoonlinewhatthe

codehadalreadyexpeditedinphysicalspace,whichwastoeliminatetheneedto

negotiateandcreatecontractsforeverysingleitem,likeatubeoftoothpaste,no

matterhowsmallitsprice.Evenso,wehadtotrustmiddlementomanage

transactions,andtheyhadthepowertodenythetransaction,delayit,andhold

themoneyintheirownaccount(bankerscallthis“float”),orclearitonlyto

reverseitlater.Theyexpectedapercentageofpeopletocheatandaccepteda

certainleveloffraudasunavoidable.

Inthisgreatburstofefficiency,legitimaterightsgottrampled,therightsnot

onlytoprivacyandsecuritybutalsofreespeech,reputation,andequal

participation.Peoplecouldanonymouslycensorus,defameus,andblockusat

littlecostorrisktothemselves.Filmmakerswhodependedonrevenuesfrom

syndication,videoondemand,enhancedDVDsales,andcablerightstofilms

releaseddecadesearlierfoundtheirrevenuestreamdryinguptoatrickleastheir

fansuploadeddigitalfilesforotherstodownloadforfree.

Breakthrough:Theproofofworkrequiredtomintcoinsalsotime-stamps

transactions,sothatonlythefirstspendofacoinwouldclearandsettle.

CombinedwithPKI,theblockchainnotonlypreventsadoublespendbutalso

confirmsownershipofeverycoinincirculation,andeachtransactionis

immutableandirrevocable.Inotherwords,wecan’ttradewhatisn’toursonthe

blockchain,whetherit’srealproperty,intellectualproperty,orrightsof

personhood.Norcanwetradewhatwearen’tauthorizedtotradeonsomebody

else’sbehalfinanagencyrole,perhapsasalawyeroracompanymanager.And

wecan’tstiflepeople’sfreedomofexpression,assembly,andreligion.

HalukKulinofPersonalBlackBoxsaiditbest:“Inthethousandsofyearsof

humansocialinteraction,everytimewe’vetakentherightofparticipationfrom

thepeople,theyhavecomebackandbrokenthesystem.We’rediscoveringthat,

evenindigital,stealingtheirconsentisnotsustainable.”

AstheLedgerof

Everything,theblockchaincanserveasapublicregistrythroughsuchtoolsas

ProofofExistence(PoE),asitethatcreatesandregisterscryptographicdigests

ofdeeds,titles,receipts,orlicensesontheblockchain.ProofofExistence

doesn’tmaintainacopyofanyoriginaldocument;thehashofthedocumentis

calculatedontheuser’smachine,notonthePoEsite,thusensuring

confidentialityofcontent.EvenifacentralauthorityshutsdownProofof

Existence,theproofremainsontheblockchain.

Sotheblockchainprovides

meansofprovingownershipandpreservingrecordswithoutcensorship.

OntheInternet,wecouldn’tnecessarilyenforcecontractualrightsoroversee

implementation.Andso,formorecomplextransactionsinvolvingbundlesof

rightsandmultipleparties,wenowhavethesmartcontract,apieceofspecial

purposecodethatexecutesacomplexsetofinstructionsontheblockchain.

“Thatintersectionoflegaldescriptionsandsoftwareisfundamental,andthe

smartcontractsarethefirststepinthatdirection,”saidSteveOmohundro,

presidentofthinktankSelf-AwareSystems.“Oncetheprinciplesofhowyou

codifylawdigitallybecomemoreunderstood,thenIthinkeverycountrywill

startdoingit....Eachjurisdictionwouldencodeitslaws,preciselyand

digitally,andtherewouldbetranslationprogramsbetweenthem....Gettingrid

ofthefrictionofalllegalstuffisgoingtobeahugeeconomicgain.”

Asmartcontractprovidesameansforassigningusagerightstoanother

party,asacomposermightassignacompletedsongtoamusicpublisher.The

codeofthecontractcouldincludethetermordurationoftheassignment,the

magnitudeofroyaltiesthatwouldflowfromthepublisher’stothecomposer’s

bitcoinaccountduringtheterm,andsometriggersforterminatingthecontract.

Forexample,ifthecomposer’saccountreceivedlessthanaquarterofabitcoin

inaconsecutivethirty-dayperiod,thenallrightswouldautomaticallyrevertto

thecomposer,andthepublisherwouldnolongerhaveaccesstothecomposer’s

workregisteredontheblockchain.Tosetthissmartcontractinmotion,boththe

composerandthepublisher—andperhapsrepresentativesofthepublisher’s

financeandlegalteams—wouldsignusingtheirprivatekeys.

Asmartcontractalsoprovidesameansforownersofassetstopooltheir

resourcesandcreateacorporationontheblockchain,wherethearticlesof

incorporationarecodedintothecontract,clearlyspellingoutandenforcingthe

rightsofthoseowners.Associatedagency-employmentcontractscoulddefine

thedecisionrightsofmanagersbycodingwhattheycouldandcouldn’tdowith

corporateresourceswithoutownershippermission.

Smartcontractsareunprecedentedmethodsofensuringcontractual

compliance,includingsocialcontracts.“Ifyouhaveabigtransactionwitha

specificcontrolstructure,youcanpredicttheoutcomeatanyperiodintime,”

saidAntonopoulos.“IfIhaveafullyverifiedsignedtransactionwithanumber

ofsignaturesinamultisignatureaccount,Icanpredictwhetherthattransaction

willbeverifiablebythenetwork.Andifitisverifiablebythenetwork,thenthat

transactioncanberedeemedandirrevocablyso.Nocentralauthorityorthird

partycanrevokeit,noonecanoverridetheconsensusofthenetwork.That’sa

newconceptinbothlawandfinance.Thebitcoinsystemprovidesaveryhigh

degreeofcertaintyastotheoutcomeofacontract.”

Thecontractcouldn’tbeseized,stopped,orredirectedtoadifferentbitcoin

address.Youneedonlytotransmitthesignedtransactiontoanyofthebitcoin

networknodesfromanywhereusinganymedium.SaidAntonopoulos,“People

couldshutdowntheInternet,andIcouldstilltransmitthattransactionover

shortwaveradiowithMorsecode.Agovernmentagencycouldtrytocensormy

communication,andIcouldstilltransmitthattransactionasaseriesofsmiley

emoticonsoverSkype.Aslongassomeoneontheotherendcoulddecodethe

transactionandrecorditintheblockchain,Icouldeffectthe[smartcontract].So

we’veconvertedsomethingthat,inlaw,isalmostimpossibletoguaranteeinto

somethingthathasverifiablemathematicalcertainty.”

Considerpropertyrights,bothrealandintellectual:“Ownershipisjusta

recognitionbyagovernmentoranagencythatyouownsomethingandtheywill

defendyourclaimsonthatownership,”saidStephenPair,CEOofBitPay.

“That’sjustacontractthatcanbesignedbywhateverauthoritythatwilldefend

yourrightsforyouandtheysignitovertoyouridentity,andthenonceyouhave

that,andthatownershipisrecorded,youthencantransferittootherpeople.

That’sverystraightforward.”

Communitieswithsharedresourcescould

consideraspectrumofrights,borrowingfromNobelPrize–winningeconomist

ElinorOstrom’spyramidofrights,apeckingorderofsorts.Atthelowestlevel,

thereareauthorizeduserswhomayonlyaccessandwithdrawresources;

claimantswhohavethoserightsbutcanalsoexcludeothersfromaccess;

proprietorswhoholdmanagementrightsbeyondaccessandexclusion;and

ownerswhocanaccess,use,excludeothers,manage,andselltheresource(i.e.,

rightofalienation).

Nowconsidertherightstoprivacyandpublicity:“Ourmodelisreallyrights

appliedtothemarket,”saidKulinofPersonalBlackBox.Hiscompanyuses

blockchaintechnologytorepresentandenforcetherightsofindividualsto

extractvaluefromtheirpersonaldata.“Theblockchainprovidesusawhole

groupofpeoplewhoarebothmission-alignedandtechnology-alignedtocreate

differentwaysthatenterprisescanleveragetheseuniquedatasetsratherthan

protecttheirdatasilos.”

Simplyput,peoplecreatebetterdatathanwhata

companycanfrackfromthem,andconsumersaremuchbetteratemotionally

aligningwithbrandsandinfluencingtheirpeersthancompaniesare.

ImplicationsfortheBlockchainEconomy:Asaneconomicdesign

principle,enforcingrightsmuststartwithclarifyingrights.Inthefieldof

managementscience,theholacracymovementisaninteresting,ifnot

controversial,exampleofhowmembersoforganizationsaredefiningthework

thatneedstobedoneandthenassigningrightsandtheresponsibilitytodothis

workaspartofawhole.

Whodidweagreeshouldhavethissetofdecisions

andactivitiesatourcompany?Theanswertothatquestioncanbecodifiedina

smartcontractandplacedontheblockchainsothatthedecisions,progress

towardthegoal,andincentivesarealltransparentandreachedbyconsensus.

Tobesure,thisisnotsimplyabouttechnology.It’smuchbiggerthan

physicalassets,intellectualproperty,orPersonalBlackBox’sprivacytoolwitha

publicityrightsmodulefortheKardashians.Weneedgreatereducationabout

rightsandthedevelopmentofnewunderstandingsaboutrightsmanagement

systems.We’llhavevotingrightsmanagementsystemsandpropertyrights

managementsystems.Somestart-upwillcreatearightsdashboardthatwill

indicateaperson’slevelofcivicengagement,wherevotingisbutoneofseveral

measures,likedonatingskills,reputation,time,andbitcoinorprovidingfree

accesstoone’sphysicalorintellectualproperty.Buckleup.

7.Inclusion

Principle:Theeconomyworksbestwhenitworksforeveryone.Thatmeans

loweringthebarrierstoparticipation.Itmeanscreatingplatformsfordistributed

capitalism,notjustaredistributedcapitalism.

ProblemtoBeSolved:ThefirsteraoftheInternetcreatedmanywonders

formanypeople.Butaswehavepointedout,amajorityoftheworld’s

populationisstillexcluded—notjustfromaccesstotechnologybutalsofrom

accesstothefinancialsystemandeconomicopportunity.Moreover,thepromise

thatthisnewcommunicationsmediumwouldbringprosperitytoallhasrung

hollow.Yes,ithelpedcompaniesinthedevelopedworldprovidejobsfor

millionsintheemergingeconomies.Itloweredthebarrierstoentryfor

entrepreneursandgavethedisadvantagedaccesstoopportunitiesandbasic

information.

That’snotenough.Therearestilltwobillion

peoplewithoutabank

account,andinthedevelopedworld,prosperityisactuallydecliningassocial

inequalitycontinuestogrow.Indevelopingeconomies,mobileisoftentheonly

affordablemeansofconnecting.Mostfinancialinstitutionshavemobilepayment

appsthatcombinecamerasandQRcodes.However,thefeesneededtosupport

theseintermediariesmakemicropaymentsimpractical.Consumersatthebottom

ofthepyramidstillcan’taffordtheminimumaccountbalances,minimum

paymentamounts,ortransactionfeestousethesystem.Itsinfrastructurecosts

makemicropaymentsandmicroaccountsunfeasible.

Breakthrough:SatoshidesignedthesystemtoworkontopoftheInternet

stack(TCP/IP),butitcouldrunwithouttheInternetifnecessary.Satoshi

imaginedthatthetypicalpersonwouldbeinteractingwiththeblockchain

throughwhathecalled“simplifiedpaymentverification”(SPV)modethatcan

workoncellphonestomobilizetheblockchain.Nowanyonewithaflipphone

canparticipateintheeconomy,orinamarket,asaproducerorconsumer.No

bankaccountrequired,noproofofcitizenshiprequired,nobirthcertificate

required,nohomeaddressrequired,nostablelocalcurrencyrequiredtousethe

blockchaintechnologies.Theblockchaindrasticallylowersthecostof

transmittingsuchfundsasremittances.Itsignificantlylowersthebarrierto

havingabankaccount,obtainingcredit,andinvesting.Anditsupports

entrepreneurshipandparticipationinglobaltrade.

ThatwaspartofSatoshi’svision.Heunderstoodthat,forpeoplein

developingeconomies,thesituationwasworse.Whencorruptorincompetent

bureaucratsinfailedstatesneedfundingtorunthegovernment,theircentral

banksandtreasuriessimplyprintmorecurrencyandthenprofitfromthe

differencebetweenthecostofmanufacturingandthefacevalueofthecurrency.

That’sseigniorage.Theincreaseinthemoneysupplydebasesthecurrency.Ifthe

localeconomyreallytanked—asitdidinArgentinaandUruguay,andmore

recentlyinCyprusandGreece—thesecentralbodiescouldfreezethebankassets

ofwhoevercouldn’taffordabribe.Givensuchapossibility,thewealthycould

storetheirassetsinmoretrustworthyjurisdictionsandmorestablecurrencies.

Butnotthepoor.Whatevermoneytheyhavebecomesworthless.Officials

couldsiphonoffinflowsofforeignaidandribbontheirborderswithredtape,

addingfrictiontoeveryattemptathelpingtheirpeople,frommothersand

childrenneedingfoodandmedicinetovictimsofwar,prolongeddrought,and

othernaturaldisasters.

TheAustraliamicropaymentservicemHITs(shortforMobileHandset

InitiatedTransactions)haslaunchedanewservice,BitMoby,thatenables

consumersinmorethanonehundredcountriestotopuptheirmobilephone

creditbytextingmHITsanamountofbitcoin.

Accordingtobitcoincore

developerGavinAndresen,“Youdon’tseeeverytransaction;youseeonlythe

transactionsyoucareabout.You’renottrustingpeerswithyourmoney,you’re

justtrustingthemtogiveyoutheinformationtouringacrossthenetwork.”

“Thepotentialofusingtheblockchainforpropertyrecordsintheemerging

world,wherethat’sahugeissuerelatedtopoverty,”issignificant,saidAustin

Hill.“Thereisn’tatrustedentitythathasgovernanceoverlandtitle,andso

allowingpeopletoactuallysay,‘Iownthisproperty,’andthenusethatfor

collateraltoimprovethemandtheirfamilysituationisafascinatingusecase.”

Onatechnicalnote,AndresencalledonNielsen’slawofInternetbandwidth,

wherehigh-enduserbandwidthincreasesby50percenteachyear,whereasthe

bandwidthofthemassestendstolagbytwoorthreeyears.Bandwidthlags

behindcomputerprocessingpower,whichincreasesbyabout60percent

annually(Moore’slaw).Sobandwidthisthegatingfactor,accordingtoJakob

Nielsen.

Mostdesigns—interfaces,Websites,digitalproducts,services,

organizations,andsoforth—willneedtoaccommodatethetechnologyofthe

massestoleveragenetworkeffects.Soinclusionmeansconsideringthefull

spectrumofusage—notjustthestateofthescienceofhigh-endusers,butthe

slowtechandsporadicpoweroutagesofusersinremoteregionsoftheworld’s

poorestcountries.

ImplicationsfortheBlockchainEconomy:Laterinthebook,wetackle

theissueoftheprosperityparadox—howthefirsteraoftheInternetbenefited

many,butoverallprosperityintheWesternworldformostpeopleisnolonger

improving.Thefoundationforprosperityisinclusion,andblockchainscanhelp.

Let’sbeclearthatinclusionhasmultipledimensions.Itmeansanendtosocial,

economic,andracialhegemony,anendtodiscriminationbasedonhealth,

gender,sexualidentification,orsexualpreference.Itmeansendingbarriersto

accessbecauseofwhereapersonlives,whetherapersonspentanightinjail,or

howapersonvoted,butalsoanendtoglassceilings,andgoodol’boys’clubsof

countlessvarieties.

DESIGNINGTHEFUTURE

OurconversationwithAnnCavoukianinspiredustofollowuponGermany’s

“Neveragain”promise.WecameacrossthewordsofGermanfederalpresident

JoachimGauckontheDayofRemembranceoftheVictimsofNational

Socialism,victimsofHitler’sregime.“Ourmoralobligationscannotbefulfilled

solelyatthelevelofremembrance.Therealsoexistswithinusadeepand

abidingcertaintythatremembrancebestowsamissiononus.Thatmissiontells

ustoprotectandpreservehumanity.Ittellsustoprotectandpreservetherights

ofeveryhumanbeing.”

WashealludingtogenocideinSyria,Iraq,Darfur,

Srebrenica,Rwanda,andCambodia,aftertheGermanpeoplehadvowed,

“Neveragain”?

Webelievethatblockchaintechnologycouldbeanimportanttoolfor

protectingandpreservinghumanityandtherightsofeveryhumanbeing,a

meansofcommunicatingthetruth,distributingprosperity,and—asthenetwork

rejectsthefraudulenttransactions—ofrejectingthoseearlycancerouscellsfrom

asocietythatcangrowintotheunthinkable.

Admittedly,aboldstatement.Readonandjudgeforyourself.

Fromamoreparochialandpracticalperspective,thesesevenprinciplescan

serveasaguidetodesigningthenextgenerationofhigh-performanceand

innovativecompanies,organizations,andinstitutions.Ifwedesignforintegrity,

power,value,privacy,security,rights,andinclusion,thenwewillberedesigning

oureconomyandsocialinstitutionstobeworthyoftrust.Wenowturnour

attentiontohowthiscouldrolloutandwhatyoushouldconsiderdoing.

PARTII

TRANSFORMATIONS

CHAPTER3



REINVENTINGFINANCIALSERVICES

heglobalfinancialsystemmovestrillionsofdollarsdaily,servesbillionsof

people,andsupportsaglobaleconomyworthmorethan$100trillion.

It’s

theworld’smostpowerfulindustry,thefoundationofglobalcapitalism,andits

leadersareknownastheMastersoftheUniverse.Closerup,it’saRube

Goldbergcontraptionofunevendevelopmentsandbizarrecontradictions.First,

themachinehasn’thadanupgradeinawhile.Newtechnologyhasbeenwelded

ontoaginginfrastructurehelter-skelter.ConsiderthebankofferingInternet

bankingbutstillissuingpaperchecksandrunningmainframecomputersfrom

the1970s.Whenoneofitscustomerstapshercreditcardonastate-of-the-art

cardreadertobuyaStarbucksgrandelatte,hermoneypassesthroughnofewer

thanfivedifferentintermediariesbeforereachingStarbucks’sbankaccount.The

transactiontakessecondstoclearbutdaystosettle.

ThentherearethelargemultinationalslikeAppleorGEthathaveto

maintainhundredsofbankaccountsinlocalcurrenciesaroundtheworldjustto

facilitatetheiroperations.

Whensuchacorporationneedstomovemoney

betweentwosubsidiariesintwodifferentcountries,themanagerofone

subsidiarysendsabankwirefromhisoperation’sbankaccounttotheother

subsidiary’sbankaccount.Thesetransfersareneedlesslycomplicatedandtake

days,sometimesweekstosettle.Duringthattime,neithersubsidiarycanusethe

moneytofundoperationsorinvestment,buttheintermediariescanearninterest

onthefloat.“Theadventoftechnologyessentiallytookpaper-basedprocesses

andturnedthemintosemiautomated,semielectronicprocessesbutthelogicwas

stillpaperbased,”saidVikramPandit,formerCEOofCitigroup.

Aroundeverycorner,anotherbizarreparadox:Tradersbuyandsell

securitiesontheworld’sstockexchangesinnanoseconds;theirtradesclear

instantlybuttakethreefulldaystosettle.Localgovernmentsusenofewerthan

tendifferentagents—advisers,lawyers,insurers,bankers,andmore—to

facilitatetheissuanceofamunicipalbond.

AdaylaborerinLosAngelescashes

hispaycheckatamoneymartfora4percentfee,andthenwalkshisfistfulof

dollarsovertoaconveniencestoretowireithometohisfamilyinGuatemala,

wherehegetsdingedagainonflatfees,exchangerates,andotherhiddencosts.

Oncehisfamilyhasdivviedupthesumamongitsmanymembers,nobodyhas

enoughtoopenabankaccountorgetcredit.Theyareamongthe2.2billion

peoplewholiveonlessthantwodollarsaday.

Thepaymentstheyneedtomake

aretiny,toosmallforconventionalpaymentnetworkssuchasdebitandcredit

cards,whereminimumfeesmakeso-calledmicropaymentsimpossible.Banks

simplydon’tviewservingthesepeopleasa“profitableproposition,”according

toarecentHarvardBusinessSchoolstudy.

Andsothemoneymachineisn’t

trulyglobalinscaleandscope.

Monetarypolicymakersandfinancialregulatorsoftenfindthemselves

lackingallthefacts,thankstotheplannedopacityofmanylargefinancial

operationsandthecompartmentalizationofoversight.Theglobalfinancialcrisis

of2008wasacaseinpoint.Excessleverage,alackoftransparency,andasense

ofcomplacencydrivenbyskewedincentivespreventedanyonefromidentifying

theproblemuntilitwasnearlytoolate.“Howcanyouhaveanythingwork,from

thepoliceforcetoamonetarysystem,ifyoudon’thavenumbersandlocations?”

ponderedHernandodeSoto.

Regulatorsarestilltryingtomanagethismachine

withrulesdevisedfortheindustrialage.InNewYorkState,moneytransmission

lawsdatebacktotheCivilWarwhentheprimarymeansofmovingmoney

aroundwashorseandbuggy.

It’sFranken-finance,fullofabsurdcontradictions,incongruities,hotpipes,

andpressurepots.Why,forexample,doesWesternUnionneed500,000points

ofsalearoundtheworld,whenmorethanhalftheworld’spopulationhasasmart

phone?

ErikVoorhees,anearlybitcoinpioneerandoutspokencriticofthe

bankingsystem,toldus,“ItisfastertomailananviltoChinathanitistosend

moneythroughthebankingsystemtoChina.That’scrazy!Moneyisalready

digital,it’snotlikethey’reshippingpalletsofcashwhenyoudoawire!”

Whyisitsoinefficient?AccordingtoPaulDavid,theeconomistwhocoined

thetermproductivityparadox,layingnewtechnologiesoverexisting

infrastructureis“notunusualduringhistoricaltransitionsfromonetechnological

paradigmtothenext.”

Forexample,manufacturersneededfortyyearsto

embracecommercialelectrificationoversteampower,andoftenthetwoworked

sidebysidebeforemanufacturersfinallyswitchedoverforgood.Duringthat

periodofretrofitting,productivityactuallydecreased.Inthefinancialsystem,

however,theproblemiscompoundedbecausetherehasbeennocleantransition

fromonetechnologytothenext;therearemultiplelegacytechnologies,some

hundredsofyearsold,neverquitelivinguptotheirfullpotential.

Why?Inpart,becausefinanceisamonopolybusiness.Inhisassessmentof

thefinancialcrisis,NobellaureateJosephStiglitzwrotethatbanks“weredoing

everythingtheycouldtoincreasetransactioncostsineverywaypossible.”He

arguedthat,evenattheretaillevel,paymentsforbasicgoodsandservices

“shouldcostafractionofapenny.”“Yethowmuchdotheycharge?”he

wondered.“One,two,orthreepercentofthevalueofwhatissoldormore.

Capitalandsheerscale,combinedwitharegulatoryandsociallicensetooperate

allowsbankstoextractasmuchastheycan,incountryaftercountry,especially

intheUnitedStates,makingbillionsofdollarsofprofits.”

Historically,the

opportunityforlargecentralizedintermediarieshasbeenenormous.Notonly

traditionalbanks(e.g.,BankofAmerica),butalsochargecardcompanies(Visa),

investmentbanks(GoldmanSachs),stockexchanges(NYSE),clearinghouses

(CME),wire/remittanceservices(WesternUnion),insurers(Lloyd’s),securities

lawfirms(Skadden,Arps),centralbanks(FederalReserve),assetmanagers

(BlackRock),accountancies(Deloitte),consultancies(Accenture),and

commoditiestraders(VitolGroup)makeupthisexpansiveleviathan.Thegears

ofthefinancialsystem—powerfulintermediariesthatconsolidatecapitaland

influenceandoftenimposemonopolyeconomics—makethesystemwork,but

alsoslowitdown,addcost,andgenerateoutsizedbenefitsforthemselves.

Becauseoftheirmonopolyposition,manyincumbentshavenoincentiveto

improveproducts,increaseefficiency,improvetheconsumerexperience,or

appealtothenextgeneration.

ANEWLOOKFORTHEWORLD’SSECOND-OLDESTPROFESSION

ThedaysofFranken-financearenumberedasblockchaintechnologypromises

tomakethenextdecadeoneofgreatupheavalanddislocationbutalsoimmense

opportunityforthosewhoseizeit.Theglobalfinancialservicesindustrytodayis

fraughtwithproblems:Itisantiquated,builtondecades-oldtechnologythatisat

oddswithourrapidlyadvancingdigitalworld,makingitoftentimesslowand

unreliable.Itisexclusive,leavingbillionsofpeoplewithnoaccesstobasic

financialtools.Itiscentralized,exposingittodatabreaches,otherattacks,or

outrightfailure.Anditismonopolistic,reinforcingthestatusquoandstifling

innovation.Blockchainpromisestosolvetheseproblemsandmanymoreas

innovatorsandentrepreneursdevisenewwaystocreatevalueonthispowerful

platform.

Therearesixkeyreasonswhyblockchaintechnologywillbringabout

profoundchangestothisindustry,bustingthefinancemonopoly,andoffering

individualsandinstitutionsalikerealchoiceinhowtheycreateandmanage

value.Industryparticipantstheworldovershouldtakenotice.

Attestation:Forthefirsttimeinhistory,twopartieswhoneitherknow

nortrusteachothercantransactanddobusiness.Verifyingidentityand

establishingtrustisnolongertherightandprivilegeofthefinancial

intermediary.Moreover,inthecontextoffinancialservices,thetrust

protocoltakesonadoublemeaning.Theblockchaincanalsoestablish

trustwhentrustisneededbyverifyingtheidentityandcapacityofany

counterpartythroughacombinationofpasttransactionhistory(onthe

blockchain),reputationscoresbasedonaggregatereviews,andother

socialandeconomicindicators.

Cost:Ontheblockchain,thenetworkbothclearsandsettlespeer-to-

peervaluetransfers,anditdoessocontinuallysothatitsledgeris

alwaysuptodate.Forstarters,ifbanksharnessedthatcapability,they

couldeliminateanestimated$20billioninback-officeexpenseswithout

changingtheirunderlyingbusinessmodel,accordingtotheSpanish

bankSantander,thoughtheactualnumberissurelymuchgreater.

With

radicallylowercosts,bankscouldofferindividualsandbusinesses

greateraccesstofinancialservices,markets,andcapitalinunderserved

communities.Thiscanbeaboonnotonlytoincumbentsbutalsoto

scrappyupstartsandentrepreneurseverywhere.Anyone,anywhere,with

asmartphoneandanInternetconnectioncouldtapintothevastarteries

ofglobalfinance.

Speed:Today,remittancestakethreetosevendaystosettle.Stocktrades

taketwotothreedays,whereasbankloantradestakeonaveragea

staggeringtwenty-threedaystosettle.

TheSWIFTnetworkhandles

fifteenmillionpaymentordersadaybetweententhousandfinancial

institutionsgloballybuttakesdaystoclearandsettlethem.

Thesame

istrueoftheAutomatedClearingHouse(ACH)system,whichhandles

trillionsofdollarsofU.S.paymentsannually.Thebitcoinnetworktakes

anaverageoftenminutestoclearandsettlealltransactionsconducted

duringthatperiod.Otherblockchainnetworksareevenfaster,andnew

innovations,suchastheBitcoinLightningNetwork,aimtodramatically

scalethecapacityofthebitcoinblockchainwhiledroppingsettlement

andclearingtimestoafractionofasecond.

“Inthecorresponding

bankingworld,whereyouhaveasenderinonenetworkandareceiver

inanother,youhavetogothroughmultipleledgers,multiple

intermediaries,multiplehops.Thingscanliterallyfailinthemiddle.

There’sallkindsofcapitalrequirementsforthat,”saidRippleLabsCEO

ChrisLarsen.

Indeed,theshifttoinstantandfrictionlessvaluetransfer

wouldfreeupcapitalotherwisetrappedintransit,badnewsforanyone

profitingfromthefloat.

RiskManagement:Blockchaintechnologypromisestomitigateseveral

formsoffinancialrisk.Thefirstissettlementrisk,theriskthatyour

tradewillbouncebackbecauseofsomeglitchinthesettlementprocess.

Thesecondiscounterpartyrisk,theriskthatyourcounterpartywill

defaultbeforesettlingatrade.Themostsignificantissystemicrisk,the

totalsumofalloutstandingcounterpartyriskinthesystem.Vikram

PanditcalledthisHerstattrisk,namedafteraGermanbankthatcouldn’t

meetitsliabilitiesandsubsequentlywentunder:“Wefoundthroughthe

financialcrisisoneoftheriskswas,ifI’mtradingwithsomebody,how

doIknowthey’regoingtosettleontheotherside?”Accordingto

Pandit,instantsettlementontheblockchaincouldeliminatethatrisk

completely.Accountantscouldlookintotheinnerworkingsofa

companyatanypointintimeandseewhichtransactionswereoccurring

andhowthenetworkwasrecordingthem.Irrevocabilityofatransaction

andinstantreconciliationoffinancialreportingwouldeliminateone

aspectofagencyrisk—theriskthatunscrupulousmanagerswillexploit

thecumbersomepapertrailandsignificanttimedelaytoconceal

wrongdoing.

ValueInnovation:Thebitcoinblockchainwasdesignedformoving

bitcoins,notforhandlingotherfinancialassets.However,the

technologyisopensource,invitingexperimentation.Someinnovators

aredevelopingseparateblockchains,knownasaltcoins,builtfor

somethingotherthanbitcoinpayments.Othersarelookingtoleverage

thebitcoinblockchain’ssizeandliquiditytocreate“spin-off”coinson

so-calledsidechainsthatcanbe“colored”torepresentanyassetor

liability,physicalordigital—acorporatestockorbond,abarrelofoil,a

barofgold,acar,acarpayment,areceivableorapayable,orofcourse

acurrency.Sidechainsareblockchainsthathavedifferentfeaturesand

functionsfromthebitcoinblockchainbutthatleveragebitcoin’s

establishednetworkandhardwareinfrastructurewithoutdiminishingits

securityfeatures.Sidechainsinteroperatewiththeblockchainthrougha

two-waypeg,acryptographicmeansoftransferringassetsoffthe

blockchainandbackagainwithoutathirdpartyexchange.Othersstill

aretryingtoremovethecoinortokenaltogether,buildingtrading

platformsonprivateblockchains.Financialinstitutionsarealreadyusing

blockchaintechnologytorecord,exchange,andtradeassetsand

liabilities,andcouldeventuallyuseittoreplacetraditionalexchanges

andcentralizedmarkets,upendinghowwedefineandtradevalue.

OpenSource:Thefinancialservicesindustryisatechnologystackof

legacysystemsstandingtwentymileshighandonthevergeofteetering

over.Changesaredifficulttomakebecauseeachimprovementmustbe

backwardcompatible.Asopensourcetechnology,blockchaincan

constantlyinnovate,iterate,andimprove,basedonconsensusinthe

network.

Thesebenefits—attestation,dramaticallylowercosts,lightningspeed,lower

risks,greatinnovationofvalue,adaptability—havethepotentialtotransformnot

onlypayments,butalsothesecuritiesindustry,investmentbanking,accounting

andaudit,venturecapital,insurance,enterpriseriskmanagement,retailbanking,

andotherpillarsoftheindustry.Readon.

THEGOLDENEIGHT:HOWTHEFINANCIALSERVICESSECTOR

WILLCHANGE

Herearewhatwebelievetobetheeightcorefunctionsripefordisruption.They

arealsosummarizedinthetablehere.

1.AuthenticatingIdentityandValue:Todaywerelyonpowerful

intermediariestoestablishtrustandverifyidentityinafinancial

transaction.Theseintermediariesaretheultimatearbitersforaccessto

basicfinancialservices,suchasbankaccountsandloans.Blockchain

lowersandsometimeseliminatestrustaltogetherincertaintransactions.

Thetechnologywillalsoenablepeerstoestablishidentitythatis

verifiable,robust,andcryptographicallysecureandtoestablishtrust

whentrustisneeded.

2.MovingValue:Daily,thefinancialsystemmovesmoneyaroundthe

world,makingsurethatnodollarisspenttwice:fromtheninety-nine-

centpurchaseofasongoniTunestothetransferofbillionsofdollarsto

settleanintracompanyfundtransfer,purchaseanasset,oracquirea

company.Blockchaincanbecomethecommonstandardforthe

movementofanythingofvalue—currencies,stocks,bonds,andtitles—

inbatchesbigandsmall,todistancesnearandfar,andtocounterparties

knownandunknown.Thus,blockchaincandoforthemovementof

valuewhatthestandardshippingcontainerdidforthemovementof

goods:dramaticallylowercost,improvespeed,reducefriction,and

boosteconomicgrowthandprosperity.

3.StoringValue:Financialinstitutionsaretherepositoriesofvaluefor

people,institutions,andgovernments.FortheaverageJoe,abankstores

valueinasafetydepositbox,asavingsaccount,oracheckingaccount.

Forlargeinstitutionsthatwantreadyliquiditywiththeguaranteeofa

smallreturnontheircashequivalents,so-calledrisk-freeinvestments

suchasmoneymarketfundsorTreasurybillswilldothetrick.

Individualsneednotrelyonbanksastheprimarystoresofvalueoras

providersofsavingsandcheckingaccounts,andinstitutionswillhavea

moreefficientmechanismtobuyandholdrisk-freefinancialassets.

4.LendingValue:FromhouseholdmortgagestoT-bills,financial

institutionsfacilitatetheissuanceofcreditsuchascreditcarddebt,

mortgages,corporatebonds,municipalbonds,governmentbonds,and

asset-backedsecurities.Thelendingbusinesshasspawnedanumberof

ancillaryindustriesthatperformcreditchecks,creditscores,andcredit

ratings.Fortheindividual,it’sacreditscore.Foraninstitution,it’sa

creditrating—frominvestmentgradetojunk.Ontheblockchain,anyone

willbeabletoissue,trade,andsettletraditionaldebtinstruments

directly,therebyreducingfrictionandriskbyincreasingspeedand

transparency.Consumerswillbeabletoaccessloansfrompeers.Thisis

particularlysignificantfortheworld’sunbankedandforentrepreneurs

everywhere.

5.ExchangingValue:Daily,marketsgloballyfacilitatetheexchangeof

trillionsofdollarsoffinancialassets.Tradingisthebuyingandselling

ofassetsandfinancialinstrumentsforthepurposeofinvesting,

speculating,hedging,andarbitragingandincludestheposttradelife

cycleofclearing,settling,andstoringvalue.Blockchaincutssettlement

timesonalltransactionsfromdaysandweekstominutesandseconds.

Thisspeedandefficiencycreatesopportunitiesforunbankedand

underbankedpeopletoparticipateinwealthcreation.

6.FundingandInvesting:Investinginanasset,company,ornew

enterprisegivesanindividualtheopportunitytoearnareturn,inthe

formofcapitalappreciation,dividends,interest,rents,orsome

combination.Theindustrymakesmarkets:matchinginvestorswith

entrepreneursandbusinessownersateverystageofgrowth—from

angelstoIPOsandbeyond.Raisingmoneynormallyrequires

intermediaries—investmentbankers,venturecapitalists,andlawyersto

nameafew.Theblockchainautomatesmanyofthesefunctions,enables

newmodelsforpeer-to-peerfinancing,andcouldalsomakerecording

dividendsandpayingcouponsmoreefficient,transparent,andsecure.

7.InsuringValueandManagingRisk:Riskmanagement,ofwhich

insuranceisasubset,isintendedtoprotectindividualsandcompanies

fromuncertainlossorcatastrophe.Morebroadly,riskmanagementin

financialmarketshasspawnedmyriadderivativeproductsandother

financialinstrumentsmeanttohedgeagainstunpredictableor

uncontrollableevents.Atlastcountthenotionalvalueofalloutstanding

over-the-counterderivativesis$600trillion.Blockchainsupports

decentralizedmodelsforinsurance,makingtheuseofderivativesfor

riskmanagementfarmoretransparent.Usingreputationalsystemsbased

onaperson’ssocialandeconomiccapital,theiractions,andother

reputationalattributes,insurerswillhaveamuchclearerpictureofthe

actuarialriskandcanmakemoreinformeddecisions.

8.AccountingforValue:Accountingisthemeasurement,processing,

andcommunicationoffinancialinformationabouteconomicentities.It

isamultibillion-dollarindustrycontrolledbyfourmassiveauditfirms—

DeloitteToucheTohmatsu,PricewaterhouseCoopers,Ernst&Young,

andKPMG.Traditionalaccountingpracticeswillnotsurvivethe

velocityandcomplexityofmodernfinance.Newaccountingmethods

usingblockchain’sdistributedledgerwillmakeauditandfinancial

reportingtransparentandoccurinrealtime.Itwillalsodramatically

improvethecapacityforregulatorsandotherstakeholderstoscrutinize

financialactionswithinacorporation.

FROMSTOCKEXCHANGESTOBLOCKEXCHANGES

“WallStreethaswokenupinabigway,”

saidAustinHillofBlockstream.He

wasspeakingofthefinancialindustry’sdeepinterestinblockchaintechnologies.

ConsiderBlytheMasters,oneofthemostpowerfulpeopleonWallStreet.She

builtJPMorgan’sderivativesandcommoditiesdeskintoaglobaljuggernautand

pioneeredthederivativesmarket.Afterabriefpseudoretirement,shejoineda

NewYork–basedstart-up,DigitalAssetHoldings,asCEO.Thedecision

surprisedmany.Sheunderstoodthatthe

THEGOLDENEIGHT

BlockchainTransformationsofFinancialServices

FUNCTION BLOCKCHAINIMPACT STAKEHOLDER

1.AuthenticatingIdentityand

Value

Verifiableandrobustidentities,

cryptographicallysecured

Ratingagencies,consumerdata

analytics,marketing,retailbanking,

wholesalebanking,paymentcard

networks,regulators

2.MovingValue—makea

payment,transfermoney,and

purchasegoodsandservices

Transferofvalueinverylargeandvery

smallincrementswithoutintermediarywill

dramaticallyreducecostandspeedof

payments

Retailbanking,wholesalebanking,

paymentcardnetworks,moneytransfer

services,telecommunications,

regulators

3.StoringValue—currencies,

commodities,andfinancialassets

arestoresofvalue.Safetydeposit

box,asavingsaccount,ora

checkingaccount.Moneymarket

fundsorTreasurybills

Paymentmechanismcombinedwitha

reliableandsafestoreofvaluereducesneed

fortypicalfinancialservices;banksavings

andcheckingaccountswillbecomeobsolete

Retailbanking,brokerages,investment

banking,assetmanagement,

telecommunications,regulators

4.LendingValue—creditcard

debt,mortgages,corporatebonds,

Debtcanbeissued,traded,andsettledon

theblockchain;increasesefficiency,reduces

Wholesale,commercial,andretail

banking,publicfinance(i.e.,

municipalbonds,government

bonds,asset-backedsecurities,

andotherformsofcredit

friction,improvessystemicrisk.Consumers

canusereputationtoaccessloansfrom

peers;significantfortheworld’sunbanked

andforentrepreneurs

governmentfinance),microlending,

crowdfunding,regulators,creditrating

agencies,creditscoresoftware

companies

5.ExchangingValue—

speculating,hedging,and

arbitraging.Matchingorders,

clearingtrades,collateral

managementandvaluation,

settlementandcustody

Blockchaintakessettlementtimesonall

transactionsfromdaysandweekstominutes

andseconds.Thisspeedandefficiencyalso

createsopportunitiesforunbankedand

underbankedtoparticipateinwealth

creation

Investment,wholesalebanking,foreign

exchangetraders,hedgefunds,pension

funds,retailbrokerage,clearinghouses,

stock,futures,commoditiesexchanges;

commoditiesbrokerages,centralbanks,

regulators

6.FundingandInvestinginan

Asset,Company,Start-up—

capitalappreciation,dividends,

interest,rents,orsome

combination

Newmodelsforpeer-to-peerfinancing,

recordingofcorporateactionssuchas

dividendspaidautomaticallythroughsmart

contracts.Titlesregistrytoautomateclaims

torentalincomeandotherformsofyield

Investmentbanking,venturecapital,

legal,audit,propertymanagement,

stockexchanges,crowdfunding,

regulators

7.InsuringValueandManaging

Risk—protectassets,homes,

lives,health,businessproperty,

andbusinesspractices,derivative

products

Usingreputationalsystems,insurerswill

betterestimateactuarialrisk,creating

decentralizedmarketsforinsurance.More

transparentderivatives

Insurance,riskmanagement,wholesale

banking,brokerage,clearinghouses,

regulators

8.AccountingforValue—new

corporategovernance

Distributedledgerwillmakeauditand

financialreportingrealtime,responsive,and

transparent,willdramaticallyimprove

capacityofregulatorstoscrutinizefinancial

actionswithinacorporation

Audit,assetmanagement,shareholder

watchdogs,regulators

blockchainwouldtransformherbusinessastheInternettransformedother

industries:“Iwouldtakeitaboutasseriouslyasyoushouldhavetakenthe

conceptoftheInternetinthe1990s.It’sabigdealanditisgoingtochangethe

wayourfinancialworldoperates.”

Mastershaddismissedmanyoftheearlytalesofbitcoin,exploitedbydrug

dealers,harnessedbygamblers,andhailedbylibertariansascreatinganew

worldorder.Thatchangedinlate2014.Masterstoldus,“Ihadan‘ahamoment’

whereIbegantoappreciatethepotentialimplicationsofthetechnologyforthe

worldthatIknewwell.Whilstthecryptocurrencyapplicationofthedistributed

ledgerstechnologywasinterestingandhadimplicationsforpayments,the

underlyingdatabasetechnologyitselfhadfarbroaderimplications.”

According

toMasters,blockchaincouldreduceinefficienciesandcosts“byallowing

multiplepartiestorelyonthesameinformationratherthanduplicatingand

replicatingitandhavingtoreconcileit.”Asamechanismforshared,

decentralized,replicatedtransactionrecords,blockchainisthe“goldensource,”

shesays.

“Bearinmindthatfinancialservicesinfrastructureshavenotevolvedin

decades.Thefrontendhasevolvedbutnotthebackend,”saysMasters.“It’s

beenanarmsraceintechnologyinvestmentorientedtowardspeedingup

transactionexecutionsothat,nowadays,competitiveadvantagesaremeasuredin

fractionsofnanoseconds.Theironyisthattheposttradeinfrastructurehasn’t

reallyevolvedatall.”Itstilltakes“daysandinsomecasesweeksofdelaytodo

theposttradeprocessingthatgoesintoactuallysettlingfinancialtransactionsand

keepingrecordofthem.”

Mastersisnotaloneinherenthusiasmforblockchaintechnology.NASDAQ

CEOBobGreifeldsaid,“Iamabigbelieverintheabilityofblockchain

technologytoeffectfundamentalchangeintheinfrastructureofthefinancial

serviceindustry.”

Greifeldisintegratingblockchain’sdistributedledger

technologyintoNASDAQ’sprivatemarketsplatformthroughaplatformcalled

NASDAQLinq.Exchangesarecentralizedmarketplacesforsecuritiesandthey

arealsoripefordisruption.OnJanuary1,2016,NASDAQLinqcompletedits

firsttradeonblockchain.AccordingtoBlockstream’sHill,oneofthelargest

assetmanagersintheworld“hasmorepeoplededicatedtoitsblockchain

innovationgroupthanwehaveinourentirecompany.”Hill’scompanyhas

raisedover$75millionandemploysmorethantwentypeople.“Theseguysare

seriousaboutmakingsurethattheyunderstandhowtheycanusethetechnology

tochangehowtheydobusiness.”

TheNYSE,GoldmanSachs,Santander,

Deloitte,RBC,Barclays,UBS,andvirtuallyeverymajorfinancialfirmglobally

havetakenasimilarseriousinterest.In2015,WallStreet’sopinionof

blockchaintechnologybecameuniversallypositive:inonestudy,94percentof

respondentssaidblockchaincouldplayanimportantroleinfinance.

AlthoughmanyotherapplicationspiquetheinterestofWallStreet,what

interestsfinancialexecutiveseverywhereisthenotionofusingtheblockchainto

processanytradesecurelyfrombeginningtoend,whichcoulddramatically

lowercosts,increasespeedandefficiency,andmitigateriskintheirbusinesses.

Masterssaid,“Theentirelifecycleofatradeincludingitsexecution,thenetting

ofmultipletradesagainsteachother,thereconciliationofwhodidwhatwith

whomandwhethertheyagree,canoccuratthetradeentrylevel,muchearlierin

thestackofprocess,thanoccursinthemainstreamfinancialmarket.”

Greifeld

putitthisway:“Wecurrentlysettletrades‘T+3’(thatis,threedays).Whynot

settleinfivetotenminutes?”

WallStreettradesinrisk,andthistechnologycanmateriallyreduce

counterpartyrisk,settlementrisk,andthussystemicriskacrossthesystem.Jesse

McWaters,financialinnovationleadattheWorldEconomicForum,toldus,

“Themostexcitingthingaboutdistributedledgertechnologyishowtraceability

canimprovesystemicstability.”Hebelievesthese“newtoolsallowregulatorsto

usealightertouch.”

Theblockchain’spublicnature—itstransparency,its

searchability—plusitsautomatedsettlementandimmutabletimestamps,allow

regulatorstoseewhat’shappening,evensetupalertssothattheydon’tmiss

anything.

DR.FAUST’SBLOCKCHAINBARGAIN

Banksandtransparencyrarelygohandinhand.Mostfinancialactorsgain

competitiveadvantagefrominformationasymmetriesandgreaterknow-how

thantheircounterparties.However,thebitcoinblockchainasconstructedisa

radicallytransparentsystem.Forbanks,thismeansopeningthekimono,soto

speak.Sohowdowereconcileanopenplatformwiththeclosed-doorpolicyof

banks?

AustinHillcalleditWallStreet’s“Faustianbargain,”anoneroustrade-off.

“Peoplelovetheideaofnothavingtowaitthreedaystosettletransactionsbut

havingthemclearedwithinminutesandknowingthatthey’refinalandthat

they’retrue,”saidHill.“Thecounterparttothatisalltransactionsonthe

[bitcoin]blockchainarecompletelypublic.Thatterrifiesanumberofpeopleon

WallStreet.”Thesolution?Confidentialtransactionsonso-calledpermissioned

blockchains,alsoknownasprivateblockchains.Whereasthebitcoinblockchain

isentirelyopenandpermissionless—thatis,anyonecanaccessitandinteract

withit—permissionedblockchainsrequireuserstohavecertaincredentials,

givingthemalicensetooperateonthatparticularblockchain.Hillhasdeveloped

thetechnologywherebyonlyafewstakeholdersseethevariouscomponentsofa

transactionandcanensureitsintegrity.

Atfirstblush,privateandpermissionedblockchainswouldappeartohavea

fewclearadvantages.Forone,itsmemberscaneasilychangetherulesofthe

blockchainiftheysodesire.Costscanbekeptdownastransactionsneedonly

validationfromthemembersthemselves,removingtheneedforanonymous

minerswhouselotsofelectricity.Also,becauseallpartiesaretrusted,a51

percentattackisunlikely.Nodescanbetrustedtobewellconnected,asinmost

usecasestheyarelargefinancialinstitutions.Furthermore,theyareeasierfor

regulatorstomonitor.However,theseadvantagesalsocreateweaknesses.The

easieritistochangetherules,themorelikelyamemberistofloutthem.Private

blockchainsalsopreventthenetworkeffectsthatenableatechnologytoscale

rapidly.Intentionallylimitingcertainfreedomsbycreatingnewrulescaninhibit

neutrality.Finally,withnoopenvalueinnovation,thetechnologyismorelikely

tostagnateandbecomevulnerable.

Thisisnottosayprivateblockchains

won’tflourish,butfinancialservicesstakeholdersmuststilltaketheseconcerns

seriously.

RippleLabs,whichhasgainedtractionwithinbankingcircles,isdeveloping

othercleverwaystorelieveFaust.“RippleLabsisaimedatwholesalebanking,

andweuseaconsensusmethod,ratherthanaproof-of-worksystem,”saidCEO

ChrisLarsen,meaningnominersandnoanonymousnodesarevalidating

transactions.

ThecompanyChainhasitsownstrategy.With$30millionin

fundingfromVisa,NASDAQ,Citi,CapitalOne,Fiserv,andOrange,Chain

plansonbuildingenterprise-focusedblockchainsolutions,targetingthefinancial

servicesindustryfirst,whereitalreadyhasadealwithNASDAQ.“Allassetsin

thefuturewillbedigitalbearerinstrumentsrunningonmultipleblockchains,”

arguedChainCEOAdamLudwin.Butthiswon’tbethesiloedworldWallStreet

isaccustomedto,“becauseeveryoneisbuildingonthesameopenspecs.”

Wall

Streetersmightwanttocapturethistechnology,buttheywillhavetocontend

withthevalueinnovationitenables,somethingtheycan’tcontrolorpredict.

Mastersalsoseesthevirtuesofpermissionedblockchains.Forher,onlya

smallcoterieoftradingpartners,somevendorsandothercounterparties,and

regulatorsneedhaveaccess.Thoseselectfewchosenwillbegrantedblockchain

credentials.ToMasters,“permissionedledgershavetheadvantageofnever

exposingaregulatedfinancialinstitutiontotheriskofeithertransactingwithan

unknownparty,anunacceptableactivityfromaregulatorypointofview,or

creatingadependencyuponanunknownserviceprovidersuchasatransaction

processor,alsounacceptablefromaregulatorypointofview.”

These

permissionedblockchains,orprivatechains,appealtotraditionalfinancial

institutionswaryofbitcoinandeverythingassociatedwithit.

WhileBlytheMastersistheCEOofastart-up,herkeeninterestrepresents

broaderinvolvementoftraditionalfinancialactorsinthissector.Thisembraceof

newtechnologyreflectsagrowingconcernthattechstart-upscanalsoupend

highfinance.ForEricPisciniofDeloitte,whoseclientshaveundergoneagreat

awakeningoverthepastyear,the“suddeninterestintechwasnotsomethingthat

anyonewasexpecting.”

Theenthusiasmisspreadinglikeacontagioninto

someofthelargestandoldestfinancialinstitutionsintheworld.

Barclaysisoneofdozensoffinancialinstitutionsexploringopportunitiesin

blockchaintechnology.AccordingtoDerekWhite,Barclays’schiefdesignand

digitalofficer,“technologiesliketheblockchainaregoingtoreshapeour

industry.”Whiteisbuildinganopeninnovationplatformthatwillallowthebank

toengageawidearrayofbuildersandthinkersinthisindustry.“We’rekeento

beshapers.Butwe’realsokeentoconnectwiththeshapersofthetechnologies

andthetranslatorsofthosetechnologies,”hesaid.

Barclaysisputtingits

moneywhereitsmouthis,cuttingtensofthousandsofjobsintraditionalareas

anddoublingdownontechnology,notablybylaunchingtheBarclays

Accelerator.AccordingtoWhite,“threeoutofthetencompaniesinourlast

cohortwereblockchainorbitcoincompanies.Blockchainisthegreatest

evidenceoftheworldmovingfromclosedsystemstoopensystemsandhas

hugepotentialimpactonthefutureofnotjustfinancialservicesbutmany

industries.”

Bankstalkingaboutopensystems—monDieu!

TheFinancialUtility

Intheautumnof2015,nineoftheworld’slargestbanks—Barclays,JPMorgan,

CreditSuisse,GoldmanSachs,StateStreet,UBS,RoyalBankofScotland,

BBVA,andCommonwealthBankofAustralia—announcedaplantocollaborate

oncommonstandardsforblockchaintechnology,dubbedtheR3Consortium.

Thirty-twomorehavesincejoinedtheeffortandeveryfewweeksanewbatch

oftheindustry’sWho’sWhosignsup.

Questionsremainabouthowseriously

thesebanksaretakingtheinitiative.Afterall,thebarriertojoiningthegroupisa

commitmentofonly$250,000,yetR3’sformationmarksaclearleapforwardfor

theindustry.Settingstandardsiscriticaltoaccelerateadoptionandusageofa

newtechnologyandsoweareoptimisticabouttheinitiative.R3haspoached

someoftheleadingvisionariesandtechnicalpractitionersinthesectortomove

theballforward.MikeHearnjoinedinNovember,addingtoateamthatincludes

RichardGendalBrown,formerlytheexecutivearchitectforbankinginnovation

atIBM,andJamesCarlyle,nowchiefengineerofR3andex–chiefengineerat

Barclays.

InDecember2015,theLinuxFoundation,incollaborationwithahuge

groupofyetmoreblue-chipcorporatepartners,launchedanotherblockchain

initiative,dubbedtheHyperledgerProject.ThisisnotacompetitortoR3;

indeed,HyperledgerProjectcountsR3asafoundingmember,alongwith

Accenture,Cisco,CLS,DeutscheBörse,DigitalAssetHoldings,DTCC,Fujitsu

Limited,IC3,IBM,Intel,JPMorgan,theLondonStockExchangeGroup,

MitsubishiUFJFinancialGroup(MUFG),StateStreet,SWIFT,VMware,and

WellsFargo.

Still,itdemonstrateshowseriouslytheindustryistakingthis

technologyandalsohowreluctantitistoembracefullyopen,decentralized

blockchainslikebitcoin.UnlikeR3,HyperledgerProjectisanopensource

projectthathastaskedacommunitytodevelopa“blockchainforbusiness.”This

iscertainlylaudableandmayverywellwork.Butdon’tbemistaken:Thisisan

opensourceprojectdesignedtobuildgatedtechnologiesby,forexample,

limitingthenumberofnodesinanetworkorrequiringcredentials.AswithR3,

oneofHyperledger’sprioritiesisstandardsetting.DavidTreatofAccenture,a

foundingmemberofthegroup,said,“Keytothisjourneyistohavestandards

andsharedplatformsthatareutilizedacrossindustryparticipants.”

Blockchainhasalsoopenedupabroaderdiscussionabouttheroleof

governmentsinoverseeingthefinancialservicesindustry.A“utility”conjures

imagesofnaturalmonopolies,highlyregulatedbythestate.However,because

blockchaintechnologypromisestoreducerisksandincreasetransparencyand

responsiveness,someindustryplayerssuggestthatthetechnologyitself

functionslikearegulation.

Ifregulatorscanpeerintotheinnerworkingsof

banksandmarkets,thensurelywecansimplifysomelawsandrepealothers,

right?Thisisatrickyquestiontoanswer.Ontheonehand,regulatorswillhave

torethinktheiroversightrole,giventhebreakneckpaceofinnovation.Onthe

otherhand,bankshaveatrackrecordofactingwithoutintegritywhen

governmentstepsaway.

Willthebigbanksreignsupremebydeployingtheblockchainwithout

bitcoin,cherry-pickingelementsofdistributedledgertechnologyandwelding

themtoexistingbusinessmodels?R3isonlyoneofmanysignsbanksare

movinginthisdirection.OnNovember19,2015,GoldmanSachsfiledapatent

for“methodsforsettlingsecuritiesinfinancialmarketsusingdistributed,peer-

to-peerandcryptographictechniques,”usingaproprietarycoincalled

SETLcoin.

Theironyofabankpatentingatechnologyoriginallyintendedas

anopensourcegifttotheworldisnotlostonus,norshoulditbeonyou.

PerhapsthisiswhatAndreasAntonopolousfearedwhenhewarnedanaudience

thatbankswouldturnbitcoinfrom“punkrocktosmoothjazz”?

Orperhaps

bankswillhavetocompetewithbest-in-classproductsandservicesamid

radicallydifferenttypesoforganizationswhoseleadersopposeeverythingthese

companiesrepresent.

Thefinancialutilityofthefuturecouldbeawalledandwell-groomed

garden,harvestedbyacabalofinfluentialstakeholders,oritcouldbeanorganic

andspaciousecosystem,wherepeople’seconomicfortunesgrowwhereverthere

islight.Thedebaterageson,butiftheexperienceofthefirstgenerationofthe

Internethastaughtusanything,it’sthatopensystemsscalemoreeasilythan

closedones.

THEBANKAPP:WHOWILLWININRETAILBANKING

TheGoogleofCapital—that’swhatJeremyAllaireisbuilding,“aconsumer

financecompanyprovidingproductstoconsumerstoholdmoney,sendmoney,

sendandreceivepayments;thefundamentalutilitiesthatpeopleexpectoutof

retailbanking.”

Heseesitasapowerful,instant,andfreeutilityforanyone

withaccesstoanInternet-enableddevice.Hiscompany,CircleInternet

Financial,isoneofthelargestandbest-fundedventuresinthespace.

CallCirclewhatyoulike,justdon’tcallitabitcoincompany.“Amazonwas

notanHTTPcompanyandGooglewasnotanSMTPcompany.Circleisnota

bitcoincompany,”saidAllaire.“Welookatbitcoinasanextgenerationof

fundamentalInternetprotocolsthatareusedinsocietyandtheeconomy.”

Allaireseesfinancialservicesasthelastholdouts,andperhapsthelargest

prize,tobefundamentallytransformedbytechnology.“Ifyoulookatretail

banking,therearethreeorfourthingsthatretailbanksdo.Oneisthatthey

provideaplacetostorevalue.Asecondisthattheyprovidesomekindof

paymentutility.Beyondthat,theyextendcreditandprovideaplaceforyouto

storewealthandgeneratepotentialincome.”

Hisvision:“Withinthreetofive

years,apersonshouldbeabletodownloadanapp,storevaluedigitallyin

whatevercurrencytheywant—dollars,euro,yen,renminbi,aswellasdigital

currency—andbeabletomakepaymentsinstantlyornearlyinstantlywith

globalinteroperability,withaveryhighlevelofsecurityandwithoutprivacy

leakage.Mostimportantly,itwillbefree.”

AstheInternettransformed

informationservices,theblockchainwilltransformfinancialservices,instigating

unimaginednewcategoriesofcapability.

AccordingtoAllaire,thebenefitsofblockchaintechnology—instant

settlement,globalinteroperability,highlevelsofsecurity,andnearlyno-cost

transactions—benefiteveryonewhetheryou’reapersonorabusiness.Andwhat

ofhisplantomakeitallfree?Heresy!saytheworld’sbankers.Surely,Goldman

SachsandtheChineseventurefirmIDGdidnotcommit$50milliontocreatea

nonprofitorpublicbenefitcompany!

“Ifwe’resuccessfulinbuildingouta

globalfranchisewithtensofmillionsofusersandwe’resittingatthecenterof

transactionbehaviorofusers,thenwearesittingonsomepowerfulassets.”

AllaireexpectsCircletohave“theunderlyingcapabilitiestodeliverother

financialproducts.”Thoughhewouldn’tspeaktoitspecifically,thefinancial

dataofmillionsofcustomerscouldbecomemorevaluabletothecompanythan

theirfinancialassets.“Wewanttoreinventtheconsumers’experienceandtheir

relationshiptomoneyandgivethemthechoiceofhowtheirmoneyisusedand

appliedandhowtheycangeneratemoneyfromtheirmoney.”

Leadersofthe

oldparadigm,takenotice.

CompanieslikeCircleareunburdenedbylegacyandculture.Theirfresh

approachcanbeabigadvantage.Manyofthegreatinnovatorsofthepastwere

consummateoutsiders.Netflixwasn’tinventedbyBlockbuster.iTuneswasn’t

inventedbyTowerRecords.Amazonwasn’tinventedbyBarnes&Noble—you

gettheidea.

StephenPair,CEOofBitPay,anearlymoverintheindustry,believes

newcomershaveadistinctadvantage.“Issuingfungibleassetslikeequities,

bonds,andcurrenciesontheblockchainandbuildingthenecessary

infrastructuretoscaleitandmakeitcommercialdon’trequireabanker’sCV,”

hesaid.Forone,“Youdon’trequireallthelegacyinfrastructureorinstitutions

thatmakeupWallStreettoday....Notonlycanyouissuetheseassetsonthe

blockchain,butyoucancreatesystemswhereIcanhaveaninstantaneous

atomictransactionwhereImighthaveApplestockinmywalletandIwantto

buysomethingfromyou.Butyouwantdollars.WiththisplatformIcanentera

singleatomictransaction(i.e.,allornone)andusemyApplestocktosendyou

dollars.”

Isitreallythateasy?Thebattletoreinventthefinancialservicesindustry

differsfromthebattlefore-commerceintheearlydaysoftheWeb.For

businesseslikeAllaire’stoscale,theymustfacilitateoneofthelargestvalue

transfersinhumanhistory,movingtrillionsofdollarsfrommillionsof

traditionalbankaccountstomillionsofCirclewallets.Notsoeasy.Banks,

despitetheirenthusiasmforblockchain,havebeenwaryofthesecompanies,

arguingblockchainbusinessesare“high-risk”merchants.Perhapstheir

reluctancestemsfromthefearofhasteningtheirowndemise.Intermediaries

havesprungupbetweentheoldandnewworlds.Vogogo,aCanadiancompany,

isalreadyworkingwithCoinbase,Kraken,BitPay,Bitstamp,andotherstoopen

bankaccounts,meetcompliancestandards,andenablecustomerstomove

moneyintobitcoinwalletsthroughtraditionalpaymentmethods.

Oh,theirony.

WhereasAmazoncouldleapfrogincumbentretailerswithease,theleadersof

thisnewparadigmmustplaynicewiththeleadersoftheold.

PerhapsweneedabankerwithSiliconValley’swillingnesstoexperiment.

SureshRamamurthifitsthatbill.TheIndian-bornformerGoogleexecutiveand

softwareengineersurprisedmanywhenhedecidedtobuyCBWBankinWier,

Kansas,population650.Forhim,thissmalllocalbankwasalaboratoryfor

usingtheblockchainprotocolandbitcoin-basedpaymentrailsforfreecross-

borderremittancepayments.Inhisview,would-beblockchainentrepreneurs

whodon’tunderstandthenuancesoffinancialservicesaredoomedtofail.He

said,“Theyaredrawingawindowonthebuilding.Makingitlookniceand

colorful.Butyoucan’tassesstheproblemfromtheoutside.Youneedtotalkto

someonefrominsidethebuilding,whoknowstheplumbing.”

Inthepastfive

years,Sureshhasservedasthebank’sCEO,CIO,chiefcomplianceofficer,

teller,janitor,and,yes,plumber.Sureshnowknowstheplumbingofbanking.

ManyWallStreetveteransdon’tseeabattlebetweenoldandnew.Blythe

Mastersbelievesthereare“atleastasmanywaysforbankstoimprovethe

efficiencyandoperationsofWallStreetasthereareopportunitiesfordisruption

fromnewentrants.”

Wecan’thelpfeelingthetidesturningtowardtheradically

new.That’swhytheBigThreeTVnetworksdidn’tcomeupwithYouTube,why

theBigThreeautomakersdidn’tcomeupwithUber,whytheBigThreehotel

chainsdidn’tcomeupwithAirbnb.BythetimetheC-suitesoftheFortune1000

decidetopursueanewavenueofgrowth,anewentranthasbroadsidedthem

withspeed,agility,andasuperioroffering.Regardlessofwholandsontop,the

collisionbetweentheunstoppableforceoftechnologicalchangeandthe

immovableobjectoffinancialservices,themostentrenchedindustryinthe

world,promisestobeanintenseone.

GOOGLETRANSLATEFORBUSINESS:NEWFRAMEWORKSFOR

ACCOUNTINGANDCORPORATEGOVERNANCE

“Accountantsarelikemushrooms—they’rekeptinthedarkandfedshit,”

said

TomMornini,CEOofSubledger,astart-uptargetingtheaccountingindustry.

Accountinghasbecomeknownasthelanguageoffinance,unintelligibletoall

butafewdisciples.Ifeverytransactionisavailableonashared,globally

distributedledger,thenwhywouldweneedpublicaccountanciestotranslatefor

us?

ModernaccountingsprangfromthecuriousmindofLucaPacioliinItaly

duringthefifteenthcentury.Hisdeceptivelysimpleinventionwasaformula

knownasdouble-entryaccounting,whereeverytransactionhastwoeffectson

eachparticipant,thatis,eachmustenterbothadebitandacreditontothe

balancesheet,theledgerofcorporateassetsandliabilities.Bycodifyingthese

rules,Pacioliprovidedordertoanotherwiseadhocpracticethatprevented

enterprisesfromscaling.

RonaldCoasethoughtaccountingwascultlike.Whileastudentatthe

LondonSchoolofEconomics,Coasesaw“aspectsofareligion”inthepractice.

“Thebooksentrustedtotheaccountants’keepingwereapparentlysacredbooks.”

Accountingstudentsdeemedhischallenges“sacrilegious.”

Howdarehe

questiontheir“manymethodsofcalculatingdepreciation,valuinginventories,

allocatingon-costs,andsoon,allofwhichgavedifferentresultsbutallofwhich

wereperfectlyacceptableaccountingpractices,”andothernearlyidentical

practicesthatwerenonethelessdeemedentirely“unrespectable.”SoTom

Morniniisbynomeansthefirsttocriticizetheprofession.

Weseefourproblemswithmodernaccounting.First,thecurrentregime

reliesuponmanagerstoswearthattheirbooksareinorder.Dozensofhigh-

profilecases—Enron,AIG,LehmanBrothers,WorldCom,Tyco,andToshiba—

showthatmanagementdoesn’talwaysactwithintegrity.Greedtoooftengets

thebestofpeople.Cronyism,corruption,andfalsereportingprecipitate

bankruptcies,joblosses,andmarketcrashes,butalsohighcostsofcapitaland

tighterreinsonequity.

Second,humanerrorisaleadingcauseofaccountingmistakes,accordingto

AccountingWEB.OftentheproblemsbeginwhenRandyinfinancefat-fingersa

numberintoaspreadsheetand,likeabutterflyflappingitswings,thesmall

mistakebecomesabigproblemasitfactorsintocalculationsacrossfinancial

statements.

Nearly28percentofprofessionalsreportedthatpeopleplugged

incorrectdataintotheirfirm’senterprisesystem.

Third,newrulessuchasSarbanes-Oxleyhavedonelittletocurbaccounting

fraud.Ifanything,thegrowingcomplexityofcompanies,moremultifaceted

transactions,andthespeedofmoderncommercecreatenewwaystohide

wrongdoing.

Fourth,traditionalaccountingmethodscannotreconcilenewbusiness

models.Takemicrotransactions.Mostauditsoftwareallowsfortwodecimal

places(i.e.,onepenny),uselessformicrotransactionsofanykind.

Accounting—themeasurement,processing,andcommunicationoffinancial

information—isnottheproblem.Itperformsacriticalfunctionintoday’s

economy.However,theimplementationofaccountingmethodsmustcatchup

withthemodernera.ConsiderthatinPacioli’sday,auditsweredonedaily.

Todaytheyhappenwiththecyclesofthemoonandtheseasons.Nameanother

industrywherefivehundredyearsoftechnologicaladvancementhaveincreased

thetimeittakestocompleteataskby9,000percent.

TheWorldWideLedger

Today,companiesrecordadebitandcreditwitheachtransaction—twoentries,

hencedouble-entryaccounting.TheycouldeasilyaddathirdentrytotheWorld

WideLedger,instantlyaccessibletothosewhoneedtoseeit—thecompany’s

shareholders,auditors,orregulators.Imaginethatwhenamassivecompanylike

Applesellsproducts,buysrawmaterials,paysitsemployees,oraccountsfor

assetsandliabilitiesonitsbalancesheet,theWorldWideLedgerrecordedthe

transactionandpublishedatime-stampedreceipttoablockchain.Thefinancial

reportsforacompanywouldbecomealivingledger—auditable,searchable,and

verifiable.Generatinganyup-to-the-minutefinancialstatementshouldbeas

simpleasaspreadsheetfunction,wheretheclickofabuttongivesyouan

immutable,complete,andsearchablefinancialstatement,freeoferror.

Companiesmightnotwanteveryoneseeingthesenumbers,andsoexecutives

mightgiveonlyregulators,managers,andotherkeystakeholderspermissioned

access.

ManyintheindustryseetheinherentimplicationsofthisWorldWide

Ledgerforaccounting.AccordingtoSimonTaylorofBarclays,suchaledger

couldstreamlinebankcompliancewithregulatorsandreducerisk.“Wedoalot

ofregulatoryreportingwherewe’rebasicallysaying,here’severythingwe’ve

done,becausewhatwe’vedonesitsinsideasystemthatnobodyelsecansee.”

AWorldWideLedgerandatransparentrecordofeverything“meansthata

regulatorwouldhaveaccesstothesamebaselayerofdata.Thatwouldmean

lesswork,lesscost,andwecouldbeheldtoaccountinnearrealtime.That’s

reallypowerful.”

ForJeremyAllaireofCircle,regulatorsbenefitthemost.

“Bankexaminershavehadtorelyuponopaque,privatelycontrolled,proprietary

ledgersandfinancialaccountingsystemstodotheirwork—the‘booksand

records,’”saidAllaire.“Withasharedpublicledger,auditorsandbank

examinerscouldhaveautomatedformsofexaminationtolookattheunderlying

healthofabalancesheetandthestrengthofacorporation—apowerful

innovationthatcouldautomatemeaningfulpartsofregulationaswellasaudit

andaccounting.”

Itbakesintegrityintothesystem.“Allfraudwouldbemuchharder.You

havetodofraudonanongoingbasisandatnopointcanyougobackand

changeyourrecords,”saidChristianLundkvist,ofBalanc3,anEthereum-based

triple-entryaccountingstart-up.

AustinHillargued,“Apublicledgerthatis

constantlyauditedandverifiedmeansyoudon’thavetotrustthebooksofyour

partner;thereisintegrityinthestatementsorthetransactionlogs,becausethe

networkitselfisverifyingit.It’slikeacontinuousaprioriauditthatisdone

cryptographically.You’renotrelyingonPricewaterhouseCoopersorDeloitte.

Thereisnocounterpartyrisk.Iftheledgersaysthisistrue,thenit’strue.”

Deloitte,oneoftheworld’sBigFouraccountingfirms,hasbeentryingto

understandtheimpactofblockchain.EricPiscini,whoheadsuptheDeloitte

cryptocurrencycenter,tellsclientsthattheblockchainis“abigriskforyourown

businessmodelbecausenowthebusinessofbankingistomanagerisk.If

tomorrowthatriskdisappears,whatareyougoingtodo?”

Overripefor

disruptionistheauditbusiness,andauditisathirdofDeloitte’srevenue.

Piscinisaid,“That’sadisruptiontoourownbusinessmodel,right?Todaywe

spendalotoftimeauditingcompanies,andwechargefeesaccordingly.

Tomorrow,ifthatprocessiscompletelystreamlinedbecausethereisatime

stampintheblockchain,thatchangesthewayweauditcompanies.”

Or

perhapseliminatestheauditfirmaltogether?

DeloittehasdevelopedasolutioncalledPermaRec(forPermanentRecord)

whereby“Deloittewouldrecordthosetransactionsintotheblockchainand

wouldthenbeabletoauditoneofthetwopartners,orbothofthem,very

quickly,becausethattransactionisrecorded.”

Butifthethirdentryonthe

blockchain—time-stampedandreadyforalltosee—happensautomatically,

anyone,anywhere,coulddeterminewhetherthebooksbalanced.Conversely,the

fastestareaofgrowthforDeloitteandtheotherbigthreeauditfirmsis

consultingservices.Manyclientsarealreadyscratchingtheirheadsoverthe

blockchain.Thisbewildermentprovidesopportunitiesformigrationupthe

advisoryvaluechain.

Mornini,apluckyentrepreneurandself-described“eternaloptimist,”likened

periodicaccountingto“watchingapersonstandupanddanceinfrontofastrobe

light.Youknowthey’redancing,butyoucan’tquitefigureoutwhat’sgoingon.

Anditlooksinteresting,butit’shardtofigureoutallthestepsinbetween.”

Periodicaccountinggivesasnapshot.Auditis,bydefinition,abackward-

lookingprocess.Creatingacompletepictureofacompany’sfinancialhealthby

lookingatperiodicfinancialstatementsisliketurningahamburgerintoacow.

AccordingtoMornini,mostlargecorporationswouldneverwanta

completelytransparentaccountingrecordinthepublicdomainorevenreadily

accessiblebypeoplewithspecialprivileges,suchasauditorsorregulators.A

company’sfinancialsareoneofitsmostguardedsecrets.Furthermore,many

companieswanttoensurethatmanagementhasacertaindegreeofflexibilityin

howitaccountsforcertainitems,suchashowtorecognizerevenue,depreciate

anasset,oraccountforagoodwillcharge.

ButMorninibelievesthatcompanieswouldbenefitfromgreater

transparency—notonlyintermsofstreamliningtheirfinancedepartmentor

loweringthecostofaudit,butinhowthemarketvaluestheircompany.Hesaid,

“Thefirstpubliccompanywiththissysteminplacewillseeasignificantprice

pershareadvantage,orpricetoearningsratioadvantage,overothercompanies

whereinvestorshavetoanxiouslyawaitthedribbleoffinancialinformationthat

theyareprovidedquarterly.”Afterall,heargues,“Whoisgoingtoinvestina

companythatshowsyouwhat’sgoingonquarterly,comparedtoonethatshows

youwhat’sgoingonallthetime?”

Willinvestorsdemandtriple-entryaccountingtomeetcorporategovernance

standards?It’snotafar-fetchedquestion.Manyinstitutionalinvestors,suchas

theCaliforniaPublicEmployees’RetirementSystem,havedevelopedstrict

corporategovernancestandards,andwillnotinvestinacompanyunlessthose

standardsaremet.

Triple-entryaccountingcouldbenext.

Triple-EntryAccounting:PrivacyIsforIndividuals,NotCorporations

Triple-entryaccountingisnotwithoutskeptics.IzabellaKaminska,aFinancial

Timesreporter,believesmandatingtriple-entryaccountingwillleadtoan

increasingnumberoftransactionsmovingoffbalancesheets.“Therewillalways

bethosewhorefusetofollowtheprotocol,whoabscondandhidesecretvaluein

paralleloff-gridnetworks,whatwecalltheblackmarket,offbalancesheet,

shadowbanking.”

Howdoesonereconcilenon-transaction-basedaccountingmeasures,

particularlytherecognitionofintangibleassets?Howarewegoingtotrack

intellectualpropertyrights,brandvalue,orevencelebritystatus—thinkTom

Hanks?HowmanybadfilmsmustthisOscarwinnermakebeforetheblockchain

impairstheHanksbrandvalue?

Theargumentfortriple-entryaccountingisnotagainsttraditional

accounting.Therewillalwaysbeareaswherewewillneedcompetentauditors.

Butiftriple-entryaccountingcanvastlyincreasetransparencyand

responsivenessthroughreal-timeaccruals,verifiabletransactionrecords,and

instantaudit,thentheblockchaincouldsolvemanyofaccounting’sbiggest

problems.Deloittewillneedsomeonetoassessinrealtimethevalueof

intangiblesandperformtheotheraccountingfunctionsthattheblockchain

cannot,ratherthanalargetaskforceofauditors.

Finally,isanimmutablerecordofeverythingtrulydesirable?InEurope,

courtsareupholdingthe“righttobeforgotten,”enforcingpeople’spetitionsto

removetheirhistoryfromtheInternet.Shouldn’tthesameprincipleapplyto

corporations?No.WhydoUberdriversgetratedoncustomersatisfactionbut

corporateexecutivesgetapass?Imagineamechanism—let’scallitatrustapp—

torecordfeedbackinapublicledgerandmaintainanindependent,searchable

scoreforcorporateintegrity.Insidetheblackboxofcorporations,sunshineisthe

bestdisinfectant.

Triple-entryaccountingisthefirstofmanyblockchaininnovationsin

corporategovernance.Likemanyinstitutionsinsociety,ourcorporationsare

sufferingfromacrisisoflegitimacy.ShareholderactivistRobertMonkswrote,

“Capitalismhasbecomeakleptocracy,runbyandfortheenrichmentofCEOs,

orwhatItermmanager-kings.”

Theblockchainreturnspowertoshareholders.Imaginethatatoken

representingaclaimonanasset,a“bitshare,”couldcomewithavoteormany

votes,eachcoloredtoaparticularcorporatedecision.Peoplecouldvotetheir

proxiesinstantlyfromanywhere,therebymakingthevotingprocessformajor

corporateactionsmoreresponsive,moreinclusive,andlesssubjectto

manipulation.Decisionswithincompanieswouldrequirerealconsensus,

multiplesignaturesonanindustrialscale,whereeachshareholderheldakeyto

thecompany’sfuture.Oncethevotesarein,thedecisionaswellastheboard

meetingminuteswouldbetime-stampedandrecordedinanimmutableledger.

Shouldn’tcorporationshavearighttochangetheirhistory,tobeforgotten?

No.Asartifactsofsociety,companieshaveresponsibilitiesthataccompanytheir

licensetooperate.Indeed,corporationshaveanobligationtosocietytopublish

anyandallinformationabouttheirdealings.Sure,corporationshavearightand

obligationtoprotecttradesecretsandtheprivacyoftheiremployees,staff,and

otherstakeholders.Butthat’sdifferentfromprivacy.Increasingtransparencyisa

hugeopportunityformanagerseverywhere:upholdthehigheststandardsof

corporategovernance,seizethemantleoftrustascorporateleaders,anddoitby

embracingtheblockchain.

REPUTATION:YOUAREYOURCREDITSCORE

Whetheryou’reapplyingforyourfirstcreditcardorseekingaloan,thebank

willvalueonenumberaboveallelse:yourcreditscore.Thisnumberismeantto

reflectyourcreditworthinessandthereforeyourriskofdefault.Itisthe

amalgamationofanumberofinputs,fromhowlongyou’veborrowedtoyour

paymenttrackrecord.Mostretailcreditdependsonit.Butthecalculationis

deeplyflawed.First,itisincrediblynarrow.Ayoungpersonwithnocredit

historymighthaveasterlingreputation,atrackrecordoffulfilling

commitments,orarichaunt.Nonefactorsintoacreditscore.Second,thescore

createsperverseincentivesforindividuals.Increasingly,peopleusedebitcards,

thatis,thecashintheiraccount.Becausetheyhavenocreditscore,theyget

penalized.Yetcreditcardfirmsencourageindividualswithoutresourcestoapply

forcreditcardsanyway.Third,scoresareverylaggy:datainputscanbeoutdated

andhavelittlerelevance.Alatepaymentattheageoftwentyhaslittlebearing

onone’screditriskatfifty.

FICO,anAmericancompanyoriginallycalledFair,IsaacandCompany,

dominatestheU.S.marketforcreditscores,yetitdoesn’tfactormostrelevant

informationintoitsanalysis.MarcAndreessensaid,“PayPalcandoareal-time

creditscoreinmilliseconds,basedonyoureBaypurchasehistory—anditturns

outthat’sabettersourceofinformationthanthestuffusedtogenerateyour

FICOscore.”

Thesefactors,combinedwithtransactionandbusinessdataand

otherattributesgeneratedbyblockchaintechnology,canenableafarmore

robustalgorithmforissuingcreditandmanagingrisk.

What’syourreputation?Weallhaveatleastone.Reputationiscriticalto

trustinbusinessandineverydaylife.Todate,financialintermediarieshavenot

usedreputationasthebasisforestablishingtrustbetweenindividualsandbanks.

Considerasmallbusinessownerwhowantstogetaloan.Moreoftenthannot,

theloanofficerwillbasethedecisionontheperson’sdocumentation,aone-point

perspectiveofidentity,andtheircreditscore.Ofcourse,ahumanbeingismore

thanthesumofaSocialSecuritynumber,placeofbirth,primaryresidence,and

credithistory.However,thebankdoesnotknow,anddoesnotcare,whether

you’reareliableemployee,anactivevolunteer,anengagedcitizen,orthecoach

ofyourkid’ssoccerteam.Theloanofficermightappreciateyouractingwith

integrity,butthebank’sscoringsystemdoesnot.Thesecomponentsof

reputationaresimplydifficulttoformulate,document,anduseassocialand

economicsystemsarecurrentlyconstructed.Mostoftheseareetherealand

ephemeral.

Sowhatdothebillionsofpeopledowhohavenoreputationbeyondtheir

immediatesocialcircle?Wherefinancialservicesareavailabletotheglobal

poor,manycan’tmeettherequisiteidentitythresholds,suchasIDcards,proof

ofresidence,orfinancialhistory.Thisisaprobleminthedevelopedworldtoo.

InDecember2015,manylargeU.S.banksrejectedthenewlyformedNewYork

IDcardsasavalidcredentialtoopenabankaccount,despitethefactthatmore

than670,000peoplesignedupforthemandthebanks’federalregulatorshad

approvedtheiruse.

Blockchaincouldsolvethisproblembyempowering

peopletoformuniqueidentitieswithavarietyofattributes,previoustransaction

historyamongthem,andgivethemnewalternativesbeyondthetraditional

bankingsystem.

Therearestillmanyusecases—particularlyincredit—wheretheblockchain

establishestrustbetweenpartieswhentrustisneeded.Blockchaintechnology

notonlyworkstoensurethatloanfundsmovetotheborrower,butalsoassures

thattheborrowerrepayswithinterest.Itempowersbothpartieswiththeirown

data,strengthenstheirprivacy,andgeneratesanewkindofpersistenteconomic

identitybasedonfactorssuchasone’spasteconomichistoryontheblockchain

andone’ssocialcapital.PatrickDeegan,CTOatidentitystart-upPersonal

BlackBox,saidthatindividualswillsomeday“deployandmanagetheirown

identity,andformtrustedconnectionswithotherpeersandnodes,”thanksto

blockchaintechnology.

Becausetheblockchainrecordsandstoresall

transactionsinanimmutablerecord,everytransactioncancountincrementally

towardreputationandcreditworthiness.Further,individualscandecidewhich

personainteractswithwhichinstitution.Deegansaid,“Icancreatedifferent

personasthatrepresentdifferentsidesofmyself,andIchoosethepersonathat

interactswiththecompany.”

Banksandothercompaniesontheblockchain

oughtnotaskforandaggregatemoreinformationthantheyneedtoprovide

service.

Thismodelhasproventowork.BTCjamisapeer-to-peerlendingplatform

thatusesreputationasthebasisforextendingcredit.Userscanlinktheirprofile

onBTCjamtoFacebook,LinkedIn,eBay,orCoinbasetoaddmoredepthand

texture.FriendscanvolunteerrecommendationsfromFacebook.Youcaneven

submityouractualcreditscoreasoneofmanyattributes.Noneofthisprivate

informationisreleased.Usersstartontheplatformwithalowcreditscore.But

youcanquicklybuildareputationbyshowingyouareareliableborrower.The

beststrategyistostartwitha“reputationloan”toproveyou’rereliable.Asa

user,youwillhavetorespondtoinvestorquestionsduringthefundingprocess.

Ignoringthesequestionsisaredflag;thecommunitywillhesitatetofundyou.

Withyourfirstloan,startwithamanageableamount,andpayitbackontime.

Onceyouhave,yourquantitativescorewillimprove,andothermembersinthe

communitymightgiveyouapositivereview.AsofSeptember2015,BTCjam

hadfundedeighteenthousandloansinexcessof$14million.

EntrepreneurErikVoorheescalledforcommonsense:“Withareputation-

basedsystem,peoplewhoaremorelikelytobeabletoaffordahouseshouldbe

abletopurchaseonemoreeasily.Thosewhoarelesslikelyshouldhaveaharder

timegettingaloan.”Tohim,thismethod“willdrivedowncostsforgoodactors

anddriveupcostsforourbadactors,whichistheproperincentive.”

In

reputationsystems,yourcreditworthinessisderivednotfromaFICOscore,but

fromanamalgamationofattributesthatformyouridentityandinformyour

abilitytorepayaloan.Creditratingsforcompanieswillalsochangetoreflect

newinformationandinsightmadepossiblebyblockchain.Imaginetoolsthatcan

aggregatereputationandtrackdifferentreputationalaspects,suchasfinancial

trustworthiness,vocationalcompetence,andsocialconsciousness.Imagine

gettingcreditbasedonsharedvalues,wherethepeopleloaningyoumoney

appreciateyourroleinthecommunityandyourgoals.

THEBLOCKCHAINIPO

TheweekofAugust17,2015,wasanuglyone:TheChinesestockmarket

crashed,theS&P500haditsworstperformanceinfouryears,andfinancial

punditseverywhereweretalkingaboutanotherglobaleconomicslowdownand

possiblecrisis.TraditionalIPOswerepulledfromthemarket,mergerswere

stalled,andSiliconValleywasgettingantsyabouttheoverinflatedvaluationof

itscherishedunicorns,privatecompaniesvaluedatmorethan$1billion.

Amidthecarnage,anenterprisecalledAugurlaunchedoneofthemost

successfulcrowdfundingcampaignsinhistory.Inthefirstweek,morethan

3,500peoplefromtheUnitedStates,China,Japan,France,Germany,Spain,the

UnitedKingdom,Korea,Brazil,SouthAfrica,Kenya,andUgandacontributeda

totalof$4million.Therewasnobrokerage,noinvestmentbank,nostock

exchange,nomandatoryfilings,noregulator,andnolawyers.Therewasn’teven

aKickstarterorIndiegogo.Ladiesandgentlemen,welcometotheblockchain

IPO.

Matchinginvestorswithentrepreneursisoneoftheeightfunctionsofthe

financialservicesindustrymostlikelytobedisrupted.Theprocessofraising

equitycapital—throughprivateplacements,initialpublicofferings,secondary

offerings,andprivateinvestmentsinpublicequities(PIPEs)—hasnotchanged

significantlysincethe1930s.

Thankstonewcrowdfundingplatforms,smallcompaniescanaccesscapital

usingtheInternet.TheOculusRiftandthePebbleWatchwereearlysuccessesof

thismodel.Still,participantscouldn’tbuyequitydirectly.Today,theU.S.

JumpstartOurBusinessStartupsActallowssmallinvestorstomakedirect

investmentsincrowdfundingcampaigns,butinvestorsandentrepreneursstill

needintermediariessuchasKickstarterorIndiegogo,andaconventional

paymentmethod,typicallycreditcardsandPayPal,toparticipate.The

intermediaryistheultimatearbiterofeverything,includingwhoownswhat.

TheblockchainIPOtakestheconceptfurther.Now,companiescanraise

funds“ontheblockchain”byissuingtokens,orcryptosecurities,ofsomevalue

inthecompany.Theycanrepresentequity,bonds,or,inthecaseofAugur,

market-makerseatsontheplatform,grantingownerstherighttodecidewhich

predictionmarketsthecompanywillopen.Ethereumwasanevengreater

successthanAugur,fundingthedevelopmentofawholenewblockchain

throughacrowdsaleofitsnativetoken,ether.TodayEthereumisthesecond-

longestandfastest-growingpublicblockchain.Theaverageinvestmentinthe

Augurcrowdfundingwas$750,butonecaneasilyimagineminimum

subscriptionsofadollaroreventencents.Anyoneintheworld—eventhe

poorestandmostremotepeople—couldbecomestockmarketinvestors.

Overstock,thee-retailer,islaunchingperhapsthemostambitious

cryptosecurityinitiativeyet.Overstock’sforward-thinkingfounder,Patrick

Byrne,believesblockchain“candoforthecapitalmarketswhattheInternethas

doneforconsumers.”Theproject,dubbedMedici,enablescompaniestoissue

securitiesontheblockchainandrecentlyreceivedthesupportoftheSecurities

andExchangeCommission.

Thecompanybeganissuingitsfirstblockchain-

basedsecurities,suchasthe$5millioncryptobondforanaffiliateofFNY

Capital,in2015.

Overstockclaimsmanyfinancialservicesfirmsandother

companiesarelininguptousetheplatform.Surely,thetacitapprovaloftheSEC

willgiveOverstockaheadstartonwhatissuretobealongjourney.

ShouldblockchainIPOscontinuetogaintraction,theywillultimately

disruptmanyoftherolesintheglobalfinancialsystem—brokers,investment

bankers,andsecuritieslawyers—andchangethenatureofinvestment.By

integratingblockchainIPOswithnewplatformsforvalueexchangesuchas

Circle,Coinbase(themostwell-fundedbitcoinexchangestart-up),Smartwallet

(aglobalassetexchangeforallformsofvalue),andotheremergingcompanies,

weexpectadistributedvirtualexchangetoemerge.Theoldguardistaking

notice.TheNYSEinvestedinCoinbaseandNASDAQisintegratingblockchain

technologyintoitsprivatemarket.BobGreifeld,CEOofNASDAQ,isstarting

small,usingblockchainto“streamlinefinancialrecordkeepingwhilemakingit

cheaperandmoreaccurate,”

butevidentlyNASDAQandotherincumbents

havebiggerplans.

THEMARKETFORPREDICTIONMARKETS

Augurisbuildingadecentralizedpredictionmarketplatformthatrewardsusers

forcorrectlypredictingfutureevents—sportingevents,electionresults,new

productlaunches,thegendersofcelebritybabies.Howdoesitwork?Augur

userscanpurchaseorsellsharesintheoutcomeofafutureevent,thevalueof

whichisanestimateoftheprobabilityofaneventhappening.Soifthereare

evenodds(i.e.,50/50),thecostofbuyingasharewouldbefiftycents.

Augurrelieson“thewisdomofthecrowd,”thescientificprinciplethata

largegroupofpeoplecanoftenpredicttheoutcomeofafutureeventwithfar

greateraccuracythanoneormoreexperts.

Inotherwords,Augurbringsthe

spiritofthemarkettobearontheaccuracyofpredictions.Therehavebeenafew

attemptsatcentralizedpredictionmarkets,suchastheHollywoodStock

Exchange,Intrade,andHedgeStreet(nowNadex),butmosthavebeenshut

downorfailedtolaunchoverregulatoryandlegalconcerns.Thinkassassination

contractsandterrorismfutures.

Usingblockchaintechnologymakesthesystemmoreresilienttofailure,

moreaccurate,andmoreresistanttocrackdowns,error,coercion,liquidity

concerns,andwhattheAugurteamcallseuphemistically“datedjurisdictional

regulation.”ThearbitersontheAugurplatformareknownasrefereesandtheir

legitimacyderivesfromtheirreputationpoints.Fordoingtherightthing—that

is,correctlystatingthataneventhappened,whowonasportingmatch,orwho

wonanelection—theyreceivemorereputationpoints.Maintainingtheintegrity

ofthesystemhasothermonetarybenefits:themorereputationpointsyouhave,

themoremarketsyoucanmake,andthusthemorefeesyoucancharge.In

Augur’swords,“ourpredictionmarketseliminatecounterpartyrisks,centralized

servers,andcreateaglobalmarketbyemployingcryptocurrenciesincluding

bitcoin,ether,andstablecryptocurrencies.Allfundsarestoredinsmart

contracts,andnoonecanstealthemoney.”

Augurresolvestheissueof

unethicalcontractsbyhavingazero-tolerancepolicyforcrime.

ToAugur’sleadershipteam,humanimaginationistheonlypracticallimitto

theutilityofpredictionmarkets.OnAugur,anyonecanpostaclearlydefined

predictionaboutanythingwithaclearenddate—fromthetrivial,“WillBradPitt

andAngelinaJoliedivorce?”tothevital,“WilltheEuropeanUniondissolveby

June1,2017?”Theimplicationsforthefinancialservicesindustry,forinvestors,

economicactors,andentiremarkets,arehuge.ConsiderthefarmerinNicaragua

orKenyawhohasnorobusttoolstohedgeagainstcurrencyrisk,politicalrisk,

orchangestotheweatherandclimate.Accessingpredictionmarketswould

allowthatpersontomitigatetheriskofdroughtordisaster.Forexample,he

couldbuyapredictioncontractthatpaysoutifacropyieldisbelowacertain

level,orifthecountrygetslessthanapredeterminedamountofrain.

Predictionmarketsareusefulforinvestorswhowanttoplacebetsonthe

outcomeofspecificeventssuchas“WillIBMbeatitsearningsbyatleastten

centsthisquarter?”Todaythereported“estimate”forcorporateearningsis

nothingmorethanthemeanormedianofafewso-calledexpertanalysts.By

harnessingthewisdomofthecrowds,wecanformmorerealisticpredictionsof

thefuture,leadingtomoreefficientmarkets.Predictionmarketscanserveasa

hedgeagainstglobaluncertaintyand“blackswan”events:“WillGreece’s

economyshrinkbymorethan15percentthisyear?”

Today,werelyonafew

talkingheadstosoundthealarms;apredictionmarketwouldactmore

impartiallyasanearlywarningsystemforinvestorsglobally.

Predictionmarketscouldcomplementandultimatelytransformmany

aspectsofthefinancialsystem.Considerpredictionmarketsontheoutcomesof

corporateactions—earningsreports,mergers,acquisitions,andchangesin

management.Predictionmarketswouldinformtheinsuranceofvalueandthe

hedgingofrisk,potentiallyevendisplacingesotericfinancialinstrumentslike

options,interestrateswapsandcreditdefaultswaps.

Ofcourse,noteverythingneedsapredictionmarket.Enoughpeopleneedto

caretomakeitliquidenoughtoattractattention.Still,thepotentialisvast,the

opportunitysignificant,andaccessavailabletoall.

ROADMAPFORTHEGOLDENEIGHT

Blockchaintechnologieswillimpacteveryformandfunctionofthefinancial

servicesindustry—fromretailbankingandcapitalmarketstoaccountingand

regulation.Theywillalsoforceustorethinktheroleofbanksandfinancial

institutionsinsociety.“Bitcoincannothavebail-ins,bankholidays,currency

controls,balancefreezes,withdrawallimits,bankinghours,”

saidAndreas

Antonopoulos.

Whereastheoldworldwashierarchical,slow-moving,reluctanttochange,

closedandopaque,andcontrolledbypowerfulintermediaries,theneworder

willbeflatter,offeringapeer-to-peersolution;moreprivateandsecure;

transparent,inclusive,andinnovative.Tobesure,therewillbedislocationand

disruption,butthereisalsoaremarkableopportunityfortheindustry’sleadersto

dosomethingaboutittoday.Thefinancialservicesindustrywillbothshrinkand

growoverthecomingyears;fewerintermediarieswillbeabletooffermore

productsandservicesatamuchlowercosttoamuchlargerpopulation.That’sa

goodthing.Whetherpermissionedandclosedblockchainswillfindaplaceina

decentralizedworldisupfordebate.BarrySilbert,whofoundedSecondMarket

andisnowCEOoftheDigitalCurrencyGroup,said,“Ihaveaverycynical

viewoftheobjectivitiesputforwardbylargefinancialincumbents.Whenall

youhaveisahammer,everythinglookslikeanail.”

Webelievethatthe

unstoppableforceofblockchaintechnologyisbarrelingdownontheentrenched,

regulated,andossifiedinfrastructureofmodernfinance.

Theircollisionwill

reshapethelandscapeoffinancefordecadestocome.Wewouldlikeittofinally

transformfromanindustrialagemoneymachineintoaprosperityplatform.

CHAPTER4



RE-ARCHITECTINGTHEFIRM:

THECOREANDTHEEDGES

BUILDINGCONSENSYS

uly30,2015,wasabigdayforaglobalgroupofcoders,investors,

entrepreneurs,andcorporatestrategistswhothinkthatEthereumisthenext

bigthing—notjustforbusiness,butpossiblyforcivilization.Ethereum,the

blockchainplatformeighteenmonthsinthemaking,wentlive.

WewitnessedthelaunchfirsthandintheBrooklynofficeofConsensus

Systems(ConsenSys),oneofthefirstEthereumsoftwaredevelopment

companies.Around11:45a.m.,therewerehighfivesallaroundastheEthereum

networkcreatedits“genesisblock,”afterwhichafrenzyofminersracedtowin

thefirstblockofether,Ethereum’scurrency.Thedaywaseerilysuspenseful.A

massivethunderstormbrokeovertheEastRiver,triggeringloudandrandom

emergencyfloodwarningsoneveryone’ssmartphones.

AccordingtoitsWebsite,Ethereumisaplatformthatrunsdecentralized

applications,namelysmartcontracts,“exactlyasprogrammedwithoutany

possibilityofdowntime,censorship,fraud,orthirdpartyinterference.”

Ethereumislikebitcoininthatitsethermotivatesanetworkofpeerstovalidate

transactions,securethenetwork,andachieveconsensusaboutwhatexistsand

whathasoccurred.Butunlikebitcoinitcontainssomepowerfultoolstohelp

developersandotherscreatesoftwareservicesrangingfromdecentralizedgames

tostockexchanges.

Ethereumwasconceivedin2013bythen-nineteen-year-oldVitalikButerin,

aCanadianofRussiandescent.Hehadarguedtothebitcoincoredevelopersthat

theplatformneededamorerobustscriptinglanguagefordeveloping

applications.Whentheyrejectedhim,hedecidedtocrafthisownplatform.

ConsenSyswasfirstofftheblock,sotospeak,launchedtocreateEthereum-

basedapps.Flash-forwardacoupleofyearsandtheanalogyisclear:Linus

TorvaldsistoLinuxwhatVitalikButerinistoEthereum.

WhendiscussingtheriseofblockchainandEthereumtechnology,Joseph

Lubin,ConsenSys’scofounder,said,“Itbecamecleartomethatinsteadof

peoplewastingtheirtimewalkingdownthestreetwithpostersonsticks,we

couldallworktogethertojustbuildthenewsolutionstothisbrokeneconomy

andsociety.”

Don’toccupyWallStreet.Inventourownstreet.

Likemanyentrepreneurs,Lubinhasaboldmission,notjusttobuildagreat

companybuttosolveimportantproblemsintheworld.Hedeadpansthatthe

companyisa“blockchainventureproductionstudio,buildingdecentralized

applications,mostlyonEthereum.”Prettylow-key.But,ifimplemented,the

applicationsthatConsenSysisbuildingwouldshakethewindowsandrattlethe

wallsofadozenindustries.Projectsincludeadistributedtriple-entryaccounting

system;adecentralizedversionofthemassivelypopularRedditdiscussion

forum,plaguedoflatebycontroversyoveritscentralizedcontrol;adocument

formationandmanagementsystemforself-enforcingcontracts(akasmart

contracts);predictionmarketsforbusiness,sports,andentertainment;anopen

energymarket;adistributedmusicmodeltocompetewithAppleandSpotify,

thoughthosetwofirmscoulduseittoo;

andasuiteofbusinesstoolsformass

collaboration,masscreation,andmassmanagementofamanagement-less

company.

OurstoryofConsenSysisnotsomuchaboutitsambitiousblockchain-based

productsorservices.It’saboutitseffortstocultivateacompanyofitsown,

pioneeringimportantnewgroundinmanagementsciencealongthelinesof

holacracy,acollaborativeratherthanhierarchicalprocessfordefiningand

aligningtheworktobedone.“WhileIdon’twantustoimplementholacracyas

is—itfeelswaytoorigidandstructuredtome—weareworkingtoincorporate

manyofitsphilosophiesinourstructureandprocesses,”saidLubin.Among

thoseholacratictenetsare“dynamicrolesratherthantraditionaljobdescriptions;

distributed,notdelegatedauthority;transparentrulesratherthanofficepolitics;

andrapidreiterationsratherthanbigreorganizations,”allofwhichdescribehow

blockchaintechnologieswork.HowConsenSysisstructured,howitcreates

value,andhowitmanagesitselfdiffersnotonlyfromtheindustrialcorporation

butalsofromthetypicaldot-com.

JoeLubinisnotanideologue,andcertainlynotananarchistorlibertarianas

someinthecryptocurrencymovementare.Buthedoesthinkthatweneedto

changecapitalismifwewantittosurvive,specificallytomoveawayfromthe

command-and-controlhierarchiesinappropriateforanetworkedworld.Henotes

thattoday,eventhoughvastnetworksenmeshtheworldandenableusallto

communicateinexpensively,richly,andimmediately,hierarchiesprevail.

Blockchaintechnologyisthecountervalence:“Globalhumansocietycannow

agreeonthetruthandmakedecisionsintenminutes,ortenseconds.Thissurely

createsanopportunitytohaveamoreenfranchisedsociety,”hesaid.Thegreater

theengagement,thegreatertheprosperity.

TheEndofManagers.LongLiveManagement

ConsenSysoperatesaccordingtoaplanthatallemployees(“members”)

developed,modified,votedon,andadopted.JoeLubindescribesitsstructureas

a“hub”ratherthanahierarchy,andeachofitsprojectsisa“spoke”inwhich

majorcontributorsholdequity.

Forthemostpart,membersofConsenSyschoosewhattheyworkon.No

top-downassignments.Lubinsaid,“Weshareasmuchaspossible,including

sharedsoftwarecomponents.Webuildsmallagileteamsbutthereis

collaborationamongthem.Wehavetonsofimmediate,open,rich

communication.”Memberschoosetoworkontwotofiveprojects.When

someoneseesapieceofworkthatneedstogetdone,heorshejumpsinand

pushesitalittleoralotfartherinavaluabledirection,asappropriateforher

role.“Wetalkaboutthingsquiteabitsopeopleareawareofthemanythings

thatcouldbepushedforward,”hesaid.Butthesemanythingscananddochange

constantly.“Partofbeingagilemeansthatprioritiesaredynamic.”

Lubinisnottheboss.Hismainoperationalroleisadvisory:“Inmanycases,

individualsaskmeorotherswhatwouldbegoodtoworkon,”hesaid.Through

Slack

andGitHub,

hesuggestsdirectionstheymightpursue“tobuildallthe

servicesandplatformsthatwewanttobuild,andmanythatwewanttobuildbut

don’tknowityet.”

Memberownershipexplicitlyincentivizesthisbehavior.Everyoneownsa

pieceofeveryprojectdirectlyorindirectly:theEthereumplatformissuestokens

thatmemberscanexchangeforetherandthenconvertintoanyothercurrency.

“Ourgoalistoachieveanicebalancebetweenindependenceand

interdependence,”Lubinsaid.“Weviewourselvesasacollectiveofclosely

collaboratingentrepreneurlikeagents.Atsomepoint,itmayprovenecessaryto

suggestthatacertainthingreallyneedstogetdoneandifnobodystepsup,to

hiresomeoneinitiallyforthatroleorincentivizeinternalpeopletodoit,”said

Lubin.But,overall,“everyoneisaself-managedadult.DidImentionwe

communicatealot?Thenweallmakeourowndecisions.”

Thewatchwordsareagility,openness,andconsensus:identifytheworkto

bedone,distributetheloadamongthepeopleeagerandabletodoit,agreeon

theirroles,responsibilities,andcompensation,andthencodifytheserightsin

“explicit,detailed,unambiguous,self-enforcingagreementsthatcanserveasthe

gluetoholdallofthebusinessaspectsofourrelationshipstogether,”hesaid.

Someagreementspayforperformance,othersmeteoutannualsalaryinether,

andstillothersaremorelike“requestsforparticipation”withbountiesattached

totaskcompletionsuchaswritingalineofcode.Ifthecodepassesthetest,then

thebountyisautomaticallyreleased.“Everythingcanbesurfacedand

appropriatelytransparent.Incentivesareexplicitandgranular,”hesaid.“This

leavesusfreetocommunicate,becreative,andadaptbasedonthese

expectations.”

Darewecointheneologismblockcom,acompanyformedandfunctioning

onblockchaintechnologies?That’sthegoal,torunasmuchofConsenSysas

possibleonEthereum,fromgovernanceandday-to-dayoperationstoproject

management,softwaredevelopmentandtesting,hiringandoutsourcing,

compensation,andfunding.Theblockchainalsoenablesreputationsystems

wherememberscanrateoneanother’sperformanceascollaborators,thereby

syndicatingtrustinthecommunity.Lubinsaid,“Persistentdigitalidentityor

personaandreputationsystemswillkeepusmorehonestandwellbehaved

towardoneanother.”

Thesecapabilitiesblurtheboundariesofacompany.Therearenodefault

settingsforincorporation.MembersoftheConsenSysecosystemcanform

spokesbyreachingconsensusonstrategy,architecture,capital,performance,and

governance.Theymaydecidetolaunchacompanythatcompeteswithinan

existingmarketorprovidesaninfrastructureforanewmarket.Onceitis

launched,theycanadjustthosesettings.

DecentralizingtheEnterprise

Theblockchainwillreducefrictionforcompanieseverywhere.“Lowerfriction

meanslowercostsasthepriceofvaluableintermediationisdeterminedviathe

mostefficientpricediscoverymechanism:decentralizedfreemarkets.Nolonger

willincumbentsbeabletoleveragelegal,regulatory,informational,andpower

asymmetriestoextractfarmorevaluefromatransactionintheirroleas

intermediarythantheyaddtoit,”Lubinsaid.

CouldConsenSysbuildsomekindoftrulydecentralizedautonomous

organizationownedandcontrolledbyitsnonhumanvaluecreators,governed

throughsmartcontractsratherthanhumanagency?“Alltheway!”saidLubin.

“Massiveintelligenceonadecentralizedglobalcomputationalsubstrate,an

underlyinglayer,shouldchangethearchitectureofthefirmfromalarge

collectionofspecializeddepartmentsrunbyhumanstosoftwareagentsthatcan

cooperateandcompeteinfreemarkets.”Someagentswillorganizeforlonger

periodsoftimetoserveongoingcustomerneeds,suchasutilityand

maintenance.Otherswillswarmaroundashort-termproblem,solveit,and

dissolvejustasquickly,havingservedtheirpurpose.

Isthereariskthatradicaldecentralizationandautomationremoveshuman

agencyindecisionmaking(e.g.,theriskofroguealgorithms)?“Iamnot

concernedaboutmachineintelligence.Wewillevolvewithitandforalongtime

itwillbeintheserviceof,oranaspectof,Homosapienscybernetica.Itmay

evolvebeyondusbutthatisfine,”Lubinsaid.“Ifso,itwilloccupyadifferent

ecologicalniche.Itwilloperateatdifferentspeedsanddifferentrelevanttime

scales.Inthatcontext,artificialintelligencewillnotdistinguishbetween

humans,arock,orageologicalprocess.Weevolvedpastlotsofspecies,many

ofwhicharedoingfine(intheirpresentforms).”

ConsenSysisstillatinycompany.Itsgrandexperimentmayormaynot

succeed.Butitsstoryprovidesaglimpseintoradicalchangesincorporate

architecturethatmayhelpunleashinnovationandharnessthepowerofhuman

capitalfornotjustwealthcreationbutprosperity.Blockchaintechnologyis

enablingnewformsofeconomicorganizationandnewportfoliosofvalue.There

aredistributedmodelsofthefirmemerging—ownership,structure,operations,

rewards,andgovernance—thatgofarbeyondenhancinginnovation,employee

motivation,andcollectiveaction.Theymaybethelong-awaitedpreconditionfor

amoreprosperousandinclusiveeconomy.

Businessleadershaveanotheropportunitytorethinkhowtheyorganize

valuecreation.Theycouldnegotiate,contract,andenforcetheiragreementson

theblockchain;dealseamlesslywithsuppliers,customers,employees,

contractors,andautonomousagents;andmaintainafleetoftheseagentsfor

otherstouse,andtheseagentscouldrentoutorlicenseanyexcesscapacityin

theirvaluechain.

CHANGINGTHEBOUNDARIESOFTHEFIRM

ThroughoutthefirsteraoftheInternet,managementthinkers(Donincluded)

talkedupthenetworkedenterprise,theflatcorporation,openinnovation,and

businessecosystemsassuccessorstothehierarchiesofindustrialpower.

However,thearchitectureoftheearly-twentieth-centurycorporationremains

prettymuchintact.Eventhebigdot-comsadoptedatop-downstructurewith

suchdecisionmakersasJeffBezos,MarissaMayer,andMarkZuckerberg.So

whywouldanyestablishedfirm—particularlyonesthatmaketheirmoneyoff

otherpeople’sdata,operatelargelybehindcloseddoors,andsuffersurprisingly

littleindatabreachafterdatabreach—wanttoleverageblockchaintechnologies

todistributepower,increasetransparency,respectuserprivacyandanonymity,

andincludefarmorepeoplewhocanaffordfarlessthanthosealreadyserved?

TransactionCostsandtheStructureoftheFirm

Let’sstartwithalittleeconomics.In1995,DonusedNobelPrize–winning

economistRonaldCoase’stheoryofthefirmtoexplainhowtheInternetwould

affectthearchitectureofthecorporation.Inhis1937paper“TheNatureofthe

Firm,”Coaseidentifiedthreetypesofcostsintheeconomy:thecostsofsearch

(findingalltherightinformation,people,resourcestocreatesomething);

coordination(gettingallthesepeopletoworktogetherefficiently);and

contracting(negotiatingthecostsforlaborandmaterialsforeveryactivityin

production,keepingtradesecrets,andpolicingandenforcingtheseagreements).

Hepositedthatafirmwouldexpanduntilthecostofperformingatransaction

insidethefirmexceededthecostofperformingthetransactionoutsidethefirm.

DonarguedthattheInternetwouldreduceafirm’sinternaltransactioncosts

somewhat;butwethought,becauseofitsglobalaccessibility,itwouldreduce

costsintheoveralleconomyevenmore,inturnloweringbarrierstoentryfor

morepeople.Yes,itdiddropsearchcosts,throughbrowsersandtheWorldWide

Web.Italsodroppedcoordinationcoststhroughe-mail,dataprocessing

applicationslikeERP,socialnetworks,andcloudcomputing.Manycompanies

benefitedfromoutsourcingsuchunitsascustomerserviceandaccounting.

Marketersengagedcustomersdirectly,eventurningconsumersintoproducers

(prosumers).Productplannerscrowdsourcedinnovations.Manufacturers

leveragedvastsupplynetworks.

However,thesurprisingrealityisthattheInternethashadperipheralimpact

oncorporatearchitecture.Theindustrial-agehierarchyisprettymuchintactas

therecognizablefoundationofcapitalism.Sure,thenetworkshaveenabled

companiestooutsourcetolow-costgeographies.ButtheInternetdropped

transactioncostsinsidethefirmaswell.

FromHierarchytoMonopoly

Socompaniestodayremainhierarchies,andmostactivitiesoccurwithin

corporateboundaries.Managersstillviewthemasabettermodelfororganizing

talentandintangibleassetssuchasbrands,intellectualproperty,knowledge,and

culture,aswellasformotivatingpeople.Corporateboardsstillcompensate

executivesandCEOsfarbeyondanyreasonablemeasureofthevaluethey

create.Notincidentally,theindustrialcomplexcontinuestogeneratewealth,but

notprosperity.Infact,aswehavepointedout,thereisstrongevidenceofa

growingconcentrationofpowerandwealthinconglomeratesandeven

monopolies.

AnotherNobellaureate,OliverWilliamson,predictedasmuch,

andpointed

outthenegativeeffectsonproductivity:“Sufficeittoobserveherethatthemove

fromautonomoussupply(bythecollectionofsmallfirms)tounifiedownership

(inonelargefirm)isunavoidablyattendedbychangesinbothincentiveintensity

(incentivesareweakerintheintegratedfirm)andadministrativecontrols

(controlsaremoreextensive).”

PeterThiel,cofounderofPayPal,wrotein

praiseofmonopoliesinhisenormouslyreadableandequallycontroversialbook,

ZerotoOne.ARandPaulsupporter,Thielsaid,“Competitionisforlosers....

Creativemonopoliesaren’tjustgoodfortherestofsociety;they’repowerful

enginesformakingitbetter.”

WhileThielmightberightaboutstrivingtodominateone’sindustryor

market,heprovidednorealevidencethatmonopoliesaregoodforconsumersor

societyasawhole.Tothecontrary,theentirebodyofcompetitionlawinmost

democraticcapitalistcountriesderivesfromacontrarynotion.Theideaoffair

competitiondatesbacktoRomantimes,withthedeathpenaltyforsome

violations.

Whenfirmshavenorealcompetition,theycangrowasinefficientas

theywant,raisingpricesinandoutsidethefirm.Lookatgovernments.Evenin

thetechnologyindustry,manyarguethatmonopoliesmayhelpwithinnovation

intheshorttermbutmayharmsocietyinthelongterm.Companiesmayamass

monopolypowerthroughcoolproductsandservicesthatcustomerslove,butthe

honeymooneventuallyends.It’snotsomuchthattheirinnovationsnolonger

delight;it’sthatthecompaniesthemselvesbegintoossify.

Mostthinkersunderstandthatinnovationtypicallycomesfromtheedgeof

thefirm,notfromitscore.HarvardUniversitylawprofessorYochaiBenkler

agrees:“MonopoliesmayhavelotsofmoneytoinvestinR&Dbuttypicallynot

theinternalcultureofpureandopenexplorationthatisrequiredforinnovation.

TheWebdidn’tcomefrommonopolies;itcamefromtheedge.Googledidnot

comefromMicrosoft.TwitterdidnotcomefromAT&T,orforthatmattereven

fromFacebook.”

Inmonopolies,layersofbureaucracydistancetheexecutives

atthetopfrommarketsignalsandemergenttechnologyattheedges,where

companiesbumpupagainstoneanotherandothermarkets,otherindustries,

othergeographies,otherintellectualdisciplines,othergenerations.Accordingto

JohnHagelandJohnSeelyBrown,“Theperipheryoftoday’sglobalbusiness

environmentiswhereinnovationpotentialisthehighest.Ignoreitatyour

peril.”

Executivesshouldbeexcitedaboutblockchaintechnology,becausethewave

ofinnovationcomingfromtheedgemaywellbeunprecedented.Fromthemajor

cryptocurrencies—Bitcoin,BlackCoin,Dash,Nxt,andRipple—tothemajor

blockchainplatforms—Lighthouseforpeer-to-peercrowdfunding,Factomasa

distributedregistry,Gemsfordecentralizedmessaging,MaidSafefor

decentralizedapplications,Storjforadistributedcloud,andTezosfor

decentralizedvotingtonameafew—thenexteraoftheInternethasrealvalue

attachedtoitandrealincentivestoparticipate.Theseplatformsholdpromisefor

protectinguseridentity,respectinguserprivacyandotherrights,ensuring

networksecurity,anddroppingtransactioncostssothateventheunbankedcan

takepart.

Unlikeincumbentfirms,theydon’tneedabrandtoconveythe

trustworthinessoftheirtransactions.Bygivingawaytheirsourcecodeforfree,

sharingpowerwitheveryoneonthenetwork,usingconsensusmechanismsto

ensureintegrity,andconductingtheirbusinessopenlyontheblockchain,they

aremagnetsofhopeforthemanydisillusionedanddisenfranchised.Assuch,

blockchaintechnologyoffersacredibleandeffectivemeansnotonlyofcutting

outintermediaries,butalsoofradicallyloweringtransactioncosts,turningfirms

intonetworks,distributingeconomicpower,andenablingbothwealthcreation

andamoreprosperousfuture.

1.SearchCosts—HowDoWeFindNewTalentandNewCustomers?

Howdowefindthepeopleandinformationweneed?Howdowedetermineif

theirservices,goods,andcapabilitiesarebestforusasweseektobringthetonic

ofthemarkettobearonourinternaloperations?

Althoughthearchitectureofthefirmisbasicallyintact,thefirsteraofthe

Internetdroppedsuchcostssignificantlyandenabledimportantchanges.

Outsourcingwasreallyjustthebeginning.Tappingintoideagoras(openmarkets

forbrainpower),companieslikeProcter&Gamblearefindinguniquely

qualifiedmindstoinnovateanewproductorprocess.Infact,60percentof

P&G’sinnovationscomefromoutsidethecompany,bybuildingorharnessing

ideagoraslikeInnoCentiveorinno360.OtherfirmslikeGoldcorphavecreated

globalchallengestosearchforthebestmindstosolvetheirtoughestproblems.

Goldcorp,whichpublisheditsgeologicaldataandtalentoutsideitsboundaries,

discovered$3.4billionworthofgold,resultinginahundredfoldincreaseinthe

company’smarketvalue.

NowimaginetheopportunitiesthatarisefromtheabilitytosearchtheWorld

WideLedger,adecentralizeddatabaseofmuchoftheworld’sstructured

information.Whosoldwhichdiscoverytowhom?Atwhatprice?Whoowns

thisintellectualproperty?Whoisqualifiedtohandlethisproject?Whatmedical

skillsdoesourhospitalhaveonstaff?Whoperformedwhattypeofsurgerywith

whatoutcomes?Howmanycarboncreditshasthiscompanysaved?Which

suppliershaveexperienceinChina?Whatsubcontractorsdeliveredontimeand

onbudgetaccordingtotheirsmartcontracts?Theresultsofthesequerieswon’t

berésumés,advertisinglinks,orotherpushedcontent;they’llbetransaction

histories,proventrackrecordsofindividualsandenterprises,rankedperhapsby

reputationscore.Getthepicture?SaidVitalikButerin,founderoftheEthereum

blockchain,“Blockchainswilldropsearchcosts,causingakindof

decompositionthatallowsyoutohavemarketsofentitiesthatarehorizontally

segregatedandverticallysegregated.Thatneverreallyexistedbefore.Instead

youhadkindofmonolithsthatdoeverything.”

Severalcompaniesareworkingonsearchenginesforblockchains,giventhe

potentialbonanza.Google’smissionistoorganizetheworld’sinformation,soit

wouldmakesenseforittoassignconsiderablemanpowertoinvestigatethis.

TherearethreekeydistinctionsbetweenInternetsearchandblockchain

search.Firstisuserprivacy.Whiletransactionsaretransparent,peopleowntheir

personaldataandcandecidewhattodowithit.Theycanparticipate

anonymouslyoratleastpseudonymously(anonymitythroughafalsename)or

quasinymously(partialanonymity).Interestedpartieswillbeabletosearchfor

informationthatusershavemadeopen.AndreasAntonopoulossaid,

“Transactionsareanonymousifyouwantthemtobeanonymous....butthe

blockchainenablesradicaltransparencyaloteasierthanitenablesradical

anonymity.”

Manyfirmswillneedtorethinkandredesigntherecruitingprocess.For

example,humanresourcesorpersonnelstaffwillneedtolearnhowtoquerythe

blockchainwithyes/noquestions:Areyouahumanbeing?Haveyouearneda

PhDinappliedmathematics?CanyoucodeinScrypt,Python,Java,C++?Are

youavailabletoworkfulltimefromJanuarythroughJunenextyear?Andother

qualifications.Thesequerieswillscurryabouttheblackboxesofpeopleonthe

jobmarketandyieldalistofpeoplewhomeetthesequalifications.Theycould

alsopayprospectivetalenttoplacepertinentprofessionalinformationona

blockchainplatformwheretheycansortthroughit.HRstaffmustmastertheuse

ofreputationsystems,movingforwardwithcandidateswithoutknowing

anythingirrelevanttothejob,suchasage,gender,race,countryoforigin.They

alsoneedsearchenginesthatcannavigatevariousdegreesofopenness,from

fullyprivatetofullypublicinformation.Theupsideisanendtosubconsciousor

eveninstitutionalbiasandheadhunterorexecutiverecruitingfees.Thedownside

isthatprecisequeriesleadtopreciseresults.Thereislesspossibilityof

serendipity,thediscoveryofacandidatewholacksthequalificationsbuthas

greatcapacitytolearnandtomaketherandomcreativeconnectionsthatafirm

desperatelyneeds.

Dittoformarketing.Firmsmayhavetopayjusttoqueryaprospective

customer’sblackbox,toseewhetherthatcustomermeetsafirm’starget

audience.Thatcustomermaydecidegloballytowithholdcertaindatasuchas

gender,becauseanoanswerisstillvaluable.Butinsodoing,thefirmwilllearn

nothingmoreabouttheprospectbeyondtheyes/noresultsofthequery.Chief

marketingofficersandmarketingagencieswillneedtorethinkanystrategy

basedone-mail,socialmedia,andmobilemarketing:wheretheinfrastructure

maylowercommunicationscoststozero,customerswillraisecoststoafigure

thatmakesreadingafirm’smessageworththeirwhile.Inotherwords,you’llbe

payingcustomerstolistentoyourelevatorpitch,butyouwillhavetailoredyour

querytopitchonlytoasharplydefinedaudiencesothatyouwillbereaching

exactlythepeopleyouwanttoreachwithoutinvadingtheirprivacy.Youcantest

differentqueriestolearnaboutdifferentmicronichesateverystageofnew

productdevelopment.Let’scallitblackboxmarketing.

Theseconddistinctionisthatsearchcanbemultidimensional.Whenyou

searchtheWorldWideWebtoday,yousearchasnapshotintime,asindexed

overthelastseveralweeks.

ComputertheoristAntonopouloscalledthistwo-

dimensionalsearch:horizontal,awidesearchacrosstheWeb,andvertical,a

deepsearchofaparticularWebsite.Thethirddimensionissequence,tosee

theseintheorderofuploadingovertime.“Theblockchaincanaddtheadditional

dimensionoftime,”hesaid.Theopportunitytosearchacompleterecordof

everythingthateverhappenedinthreedimensionsisprofound.Tomakehis

point,Antonopoulossearchedthebitcoinblockchaintofinditsfamousfirst

commercialtransaction,thepurchaseoftwopizzasdonebysomeonenamed

“Laslo”for10,000bitcoins.“Theblockchainprovidesanalmostarchaeological

record,adeepfind,preservinginformationforever.”(Tosaveyoufromdoing

themath,ifthepizzacosts$5when$1wasequalto2,500bitcoins,thatwould

beworth$3.5millionasofthewritingofthisbook...butwedigress.)

Forfirms,thismeansaneedforbetterjudgment:managersneedtohire

peoplewhohavedemonstratedgoodjudgment,becausethere’snowalkingback

poordecisions,nospinningtheorderofevents,nodenyinganexecutive’s

disreputablebehavior.Forreallyimportantdecisions,firmscouldimplement

internalconsensusmechanismswherebyallstakeholdersvoteonmission-critical

decisionstoendthechorusofignoranceanddenialofpriorknowledge.Oruse

predictionmarketstotestscenarios.Ifyou’reanexecutiveofafutureEnron,no

scapegoating.AsforNewJerseygovernorChrisChristie,goodlucktellinga

prosecutorthatyouknewnothingofplanstoclosetheGeorgeWashington

Bridge.

Thethirddistinctionisvalue:whereinformationontheInternetisabundant,

unreliable,andperishable,itisscarce,tamperproof,andpermanentonthe

blockchain.Tothislastcharacteristic,Antonopoulosnotes:“Ifthereisenough

financialincentivetopreservethisblockchainintothefuture,thepossibilityofit

existingfortens,hundreds,oreventhousandsofyearscannotbediscounted.”

Whatanamazingconcept.Theblockchainaspartofthearchaeological

record,liketheoriginalstonetabletsofMesopotamia.Paperrecordsare

ephemeralandtemporary,whereas(ironically)theoldestformofrecording

information,tablets,isthemostpermanent.Theimplicationsforcorporate

architectureareconsiderable.Imagineapermanent,searchablerecordof

importanthistoricalinformation,likethehistoryoffinance.Corporatestaff

responsiblefordevelopingfinancialstatements,annualreports,reportsto

governmentsordonors,marketingmaterialsforprospectiveemployees,clients,

andconsumers—willstartwiththispublic,indisputableviewoftheirfirm,

maybeevencreatingafilterthatenablesstakeholderstoseewhattheyseeatthe

pressofabutton.Companiescouldhavetransactiontickertapesanddashboards,

someforinternalmanagerialuseandsomepublic.Restassured:Allyour

competitorswillconstructsuchfeedsanddashboardsofyourfirmaspartof

theircompetitiveintelligenceprograms.SowhynotputthoseonyourWebsite

anddraweveryonetoyou?

Thisprovidesenormousincentiveforfirmstolookforresourcesoutside

theirboundaries,astheyhavealmostinfinitelybetterinformationaboutthe

qualitiesandrecordofcandidates,betheyindividualsorcompanies.

CompanieslikeConsenSysaredevelopingidentitysystemswherejob

prospectsorprospectivecontractorswillprogramtheirownpersonalavatarsto

disclosepertinentinformationtoemployers.Theycan’tbehackedlikea

centralizeddatabasecan.Usersaremotivatedtocontributeinformationtotheir

ownavatarsbecausetheyownandcontrolthem,theirprivacyiscompletely

configurable,andtheycanmonetizetheirowndata.Thisisverydifferentfrom,

say,LinkedIn,acentraldatabaseowned,monetized,andyetnotentirelysecured

byapowerfulcorporation.

CouldCoaseandWilliamsonhaveimaginedaplatformthatcoulddrop

searchcostssothatfirmscouldfindcapabilityoutsidetheirboundariesthatcost

lessandcouldperformbetter?

2.ContractingCosts—WhatDoWeAgreetoDo,Anyway?

Howdowecometotermswithotherpartiesorenterintoanagreement?It’sone

thingtolowerthecostsoffindingpeopleandresourcesthatcandothejob.But

that’snotenoughtoshrinkafirmsignificantly.Allpartiesmustagreetowork

together.Thesecondreasonwhywehavefirmsiscontractualcosts,suchas

negotiatingtheprice,establishingcapacity,andspellingouttheconditionsofa

supplier’sgoodsorservices;policingthemandenforcingtheterms;and

handlingremediesifpartiesdon’tdeliveraspromised.

We’vealwayshadsocialcontracts,understandingsofrelationshipsinthe

specializationofroleswheresomepeopleinthetribehuntedandprotectedthe

tribe,andothersgatheredandshelteredthetribe.Peoplehavetradedphysical

objectsinrealtimesincethedawnofmodernman.Contractsareamorerecent

phenomenon,aswebegantradingpromises,notproperty.Oralagreements

provedeasilymanipulatedormisremembered,andeyewitnesseswereunreliable.

Doubtanddistrusttemperedcollaborationwithstrangers.Contractshadtobe

fulfilledimmediately,andtherewerenoformalmechanismsforenforcementof

thetermsbeyondwhatyoucouldtakebyforce.Thewrittencontractwasaway

ofcodifyinganobligation,ofestablishingtrustandsettingexpectations.Written

contractsprovidedguidancewhensomeonedidnotholduphisendofthe

bargain,orsomethingunexpectedhappened.Buttheycouldn’texistina

vacuum;therehadtobesomelegalframeworkthatrecognizedcontractsand

enforcedeachparty’srights.

Todaycontractsarestillmadeofatoms(paper),notbits(software).Assuch

theyhavehugelimitations,servingtosimplydocumentanagreement.Aswe

shallsee,ifcontractsweresoftware—smartanddistributedontheblockchain—

theycouldopenaworldofpossibilities,nottheleastofwhichistomakeit

easierforcompaniestocollaboratewithexternalresources.Andjustimagine

howtheUniformCommercialCodemightlookontheblockchain.

Coaseandhissuccessorsarguedthatcontractingcostsarelowerinsidethe

boundariesoffirmsratherthanoutsideinthemarket—thatafirmisessentiallya

vehicleforcreatinglong-termcontractswhenshort-termcontractsaretoomuch

effort.

Williamsonadvancedthisideabyarguingthatfirmsexisttoresolve

conflicts,largelythroughmakingcontractswithvariouspartiesinsidethefirm.

Intheopenmarket,theonlydisputemechanismisthecourt—costly,timely,and

oftenunsatisfactory.Further,hearguedthatinsomecaseslikefraud,other

illegalacts,orconflictofinterest,thereisnomarketdisputemechanismatall.

“Ineffect,thecontractlawofinternalorganizationisthatofforbearance,

accordingtowhichafirmbecomesitsowncourtofultimateappeal.Firms,for

thisreason,areabletoexercisefiatthatthemarketscannot.”

Williamson

conceivedofthefirmas“agovernancestructure”forcontractualarrangements.

Hesaidthatorganizationalstructuremattersinreducingthecostsofmanaging

transactionsandthat“recoursetothelensofcontract,asagainstthelensof

choice,frequentlydeepensourunderstandingofcomplexeconomic

organization.”

Thisisarecurringthemeinmanagementtheory,perhapsmost

powerfullyexplainedbyeconomistsMichaelJensenandWilliamMeckling.

Theyarguedthatentitiesarenothingmorethanacollectionofcontractsand

relationships.

Today,someeruditeblockchainthinkershavepickeduponthisview.

EthereuminventorVitalikButerinarguesthatcorporateagents(i.e.,executives)

couldusecorporateassetsonlyforcertainpurposesapprovedby,say,aboardof

directors,whointurnaresubjecttoshareholderapproval.“Ifacorporationdoes

something,it’sbecauseitsboardofdirectorshasagreedthatitshouldbedone.If

acorporationhiresemployees,itmeansthattheemployeesareagreeingto

provideservicestothecorporation’scustomersunderaparticularsetofrules,

particularlyinvolvingpayment,”Buterinwrote.“Whenacorporationhaslimited

liability,itmeansthatspecificpeoplehavebeengrantedextraprivilegestoact

withreducedfearoflegalprosecutionbythegovernment—agroupofpeople

withmorerightsthanordinarypeopleactingalone,butultimatelypeople

nonetheless.Inanycase,it’snothingmorethanpeopleandcontractsalltheway

down.”

That’swhytheblockchain,byreducingcontractingcosts,enablesfirmsto

openupanddevelopnewrelationshipsoutsidetheirboundaries.ConsenSys,for

example,canarchitectcomplexrelationshipswithadiversesetofmembers,

someinsideitsboundaries,someoutside,andsomestraddlingwalls,because

smartcontractsgoverntheserelationshipsratherthantraditionalmanagers.

Membersself-assigntoprojects,defineagreed-upondeliverables,andgetpaid

whentheydeliver—allontheblockchain.

SmartContracts

Therateofchangeisincreasinglysettingthestageforsmartcontracts.More

peoplearedevelopingnotonlycomputerliteracy,butalsofluency.Asfaras

evidencingtransactionsgoes,thisnewdigitalmediumhassignificantlydifferent

propertiesfromitspaperpredecessors.AscryptographerNickSzabo

highlighted,notonlycantheycaptureagreaterarrayofinformation(suchas

nonlinguisticsensorydata)buttheyaredynamic:theycantransmitinformation

andexecutecertainkindsofdecisions.InSzabo’swords,“Digitalmediacan

performcalculations,directlyoperatemachinery,andworkthroughsomekinds

ofreasoningmuchmoreefficientlythanhumans.”

Forthepurposesofthisdiscussion,smartcontractsarecomputerprograms

thatsecure,enforce,andexecutesettlementofrecordedagreementsbetween

peopleandorganizations.Assuch,theyassistinnegotiatinganddefiningthese

agreements.Szabocoinedthephrasein1994,thesameyearthatNetscape,the

firstWebbrowser,hitthemarket:

Asmartcontractisacomputerizedtransactionprotocolthatexecutes

thetermsofacontract.Thegeneralobjectivesofsmartcontractdesign

aretosatisfycommoncontractualconditions(suchaspaymentterms,

liens,confidentiality,andevenenforcement),minimizeexceptionsboth

maliciousandaccidental,andminimizetheneedfortrusted

intermediaries.Relatedeconomicgoalsincludeloweringfraudloss,

arbitrationandenforcementcosts,andothertransactioncosts.

Backthen,smartcontractswereanideaalldressedupwithnowheretogo,

asnoavailabletechnologycoulddeploythemasSzabodescribed.Therewere

computersystemssuchaselectronicdatainterchange(EDI)thatprovided

standardsforthecommunicationofstructureddatabetweenthecomputersof

buyersandsellers,butnotechnologythatcouldactuallytriggerpaymentsand

causemoneytobeexchanged.

Bitcoinandtheblockchainchangedallthat.Nowpartiescanmake

agreementsandautomaticallyexchangebitcoinwhentheymeetthetermsofthe

agreement.Mostsimply,yourbrother-in-lawcan’tweaseloutofahockeybet.

Lesssimply,whenyoupurchaseastock,thetradesettlesinstantlyandtheshares

areimmediatelytransferredtoyou.Evenlesssimple,whencontractorsdeliver

thesoftwarecodethatmeetsthenecessaryspecifications,theygetpaid.

Thetechnologicalmeansofexecutinglimitedsmartcontractshasexistedfor

sometime.Acontractisabargained-forexchangeenforceablebeforethe

exchange.AndreasAntonopoulosexplainedwithasimpleexample:“Soifyou

andIweretoagreerightnowthatIwouldpayyoufiftydollarsforthepenon

yourdesk,that’saperfectlyenforceablecontract.Wecanjustsay,‘Ipromiseto

payyoufiftydollarsforthepenonyourdesk,’andyouwouldrespond,‘Yes,I

wouldlikethat.’Thatturnsouttobe‘offeracceptanceandconsideration.’We’ve

gotadeal,anditcanbeenforcedinacourt.Thathasnothingtodowiththe

technologicalmeansofimplementationofthepromisesthatwehavemade.”

WhatinterestsAndreasabouttheblockchainisthatwecanexecutethis

financialobligationinadecentralizedtechnologicalenvironmentwithabuilt-in

settlementsystem.“That’sreallycool,”hesaid,“becauseIcouldactuallypay

youforthepenrightnow,youwouldseethemoneyinstantly,youwouldputthe

peninthemail,andIcouldgetaverificationofthat.It’smuchmorelikelythat

wecandobusiness.”

Thelawprofessionisslowlypluggingintothisopportunity.Likeeveryone

inthemiddle,lawyersmaybecomesubjecttodisintermediationandwill

eventuallyneedtoadapt.Expertiseinsmartcontractscouldbeabigopportunity

forlawfirmsthatwanttoleadinnovationincontractlaw.However,the

professionisn’tknownforbreakingnewground.LegalexpertAaronWright,

coauthorofanewbookabouttheblockchain,toldus,“Lawyersarelaggards.”

Multisignature:SmartComplexContracts

But,yousay,wouldn’tthecostsofcomplexandtime-consumingnegotiationsof

smartcontractsoutweighthebenefitsofopenboundaries?Theansweratthis

pointappearstobeno.Ifpartnersspendmoretimeupfrontdeterminingthe

termsofanagreement,themonitoring,enforcement,andsettlementcostsdrop

significantly,perhapstozero.Further,settlementcanoccurinrealtime,possibly

inmicrosecondsthroughoutthedaydependingonthedeal.Mostimportant,by

partneringwithsuperiortalent,companiescanachievebetterinnovationand

becomemorecompetitive.

Let’sconsidertheuseofindependentcontractors.Intheearlydaysofdigital

trade,theblockchainaccommodatedonlythesimplesttwo-partytransactions.

Forinstance,ifAliceneededsomeonetocompleteapieceofcodequickly,she

wouldpostananonymous“coderneeded”requestonanappropriatediscussion

board.Bobwouldseeit.

Ifthepriceandtimingwereright,hewouldsend

worksamples.IfhissamplesmetAlice’sneeds,thenshemadeBobanoffer.

Theyagreedonterms:Alicewouldsendhalfthefeeimmediatelyandhalfupon

receiptofcompletionandsuccessfultestofthecode.

Theircontractwasstraightforward—anoffertohireandanacceptancetodo

thejob,anditneedn’thavebeeninwriting,thoughtheirinteractionsonthe

blockchainmadeitso.Theirownershipofbitcoinswasassociatedwithdigital

addresses(longstringsofnumbers)thathadtwocomponents:apublickeythat

servedasanaddress,andaprivatekeythatgaveitsownerexclusiveaccessto

anycoinsassociatedwiththataddress.BobsentAlicehispublickey,andshe

directedthefirstpaymentthere.Thenetworkrecordedthetransferand

associatedthosebitcoinstoBob’spublickeywallet.

Whatif,atthispoint,Bobdecidedthathedidn’twanttodotheproject?In

thistwo-partytransaction,Alicewouldhavelittlerecourse.Shecouldn’tgoto

hercreditcardcompanytoreversethetransaction.Shecouldn’t(yet)gotocivil

courtandsueBobforbreachofcontract.Beyondarandomlygenerated

alphanumericcodeandanonlineadvertisement,shewouldhavenowayof

identifyingBobunlesshe’dpostedhisadonacentralizedplatformthatcould

trackBobdown,orthey’dexchangede-mailsthroughacentralizedservice.She

could,however,indicatethathispublickeywasnottobetrusted,thuslowering

hisreputationscoreasacoder.

Withoutassurancesoftheotherparty’strustworthinessinfulfillingoff-chain

actions,thedealwasaprisoner’sdilemmaofsorts:itstillrequiredsometrust.

Reputationsystemscouldmitigatethisuncertaintytosomeextent.Butwe

neededtointroducetrustandsecurityintothisanonymousandopensystem.

In2012,“coredeveloper”GavinAndresenintroducedanewtypeofbitcoin

addresstothebitcoinprotocolscalled“paytoscripthash”(P2SH).Itspurpose

wastoallowoneparty“tofundanyarbitrarytransaction,nomatterhow

complicated.”

Partiesusemultipleauthenticatingsignaturesorkeysratherthan

asingleprivatekeytocompleteatransaction.Thecommunityusuallyrefersto

thismultiple-signaturefeatureassimply“multisig.”

Inamultisigtransaction,partiesagreeonthetotalnumberofkeysgenerated

(N)andhowmanywillberequiredtocompleteatransaction(M).Thisiscalled

anM-of-Nsignatureschemeorsecurityprotocol.Thinkofalockboxrequiring

multiplephysicalkeystoopen.Withthisfeature,BobandAlicewouldagreein

advancetoemployaneutral,disinterestedthird-partyarbitratortohelpthem

completetheirtransaction.Eachofthethreepartieswouldholdoneofthree

privatekeys,twoofwhichareneededtoaccessthetransferredfunds.Alice

wouldsendherbitcointoapublicaddress.Atthispoint,thosefundscanbe

viewedbyanyone,butaccessedbynoone.OnceBobseesthefundshavebeen

posted,hefulfillshisendofthebargain.If,uponreceiptofBob’sgoodor

service,Aliceisunsatisfiedandfeelscheated,shecouldrefusetoprovideBob

withthesecondkey.Thetwopartieswouldthenlooktothearbitrator,holderof

thethirdkey,tohelpthemresolvetheirdisagreement.Theinterventionofsuch

arbitratorsiscalledforonlyincasesofdisputeslikethese,andatnopointdo

theythemselveshaveaccesstothefunds—amechanismenablingtheriseof

“smartcontracts.”

Tocontractremotely,letaloneautomatically,youneedacertaindegreeof

trustthatthesystemwillenforceyourrightsunderthedeal.Ifyoucan’ttrustthe

otherparty,youhavetotrustthedisputeresolutionmechanismsand/orlegal

systembehindit.Multisigtechnologyallowsthesedeliberatelydisinterested

thirdpartiestobringsecurityandtrusttoanonymoustransactions.

Multisigauthenticationisgrowinginpopularity.Astart-upcalledHedgyis

usingmultisigtechnologytocreatefuturescontracts:partiesagreeonapriceof

bitcointhatwillbetradedinthefuture,onlyeverexchangingtheprice

difference.Hedgyneverholdscollateral.Thepartiesplaceitinamultisigwallet

untiltheexecutiondate.Hedgy’sgoalistousemultisigasafoundationforsmart

contractsthatarecompletelyself-executableandfullyevidencedonthe

blockchain.

Thinkoftheblockchainasadialecticbetweenanonymityand

openness,wherethemultisigfeaturereconcilesthetwowithoutlossofeither.

Amongotherthings,thesmartcontractchangestheroleofthosewithin

firmswhoareinthebusinessoffindingandcontractingfortalent.HR

departmentsneedtounderstandthattalentisoutsidetheirboundaries,notjust

inside.Theyneedtostepuptothechallengesofusingsmartcontractstolower

thecostsofbuildingrelationshipswithexternalresources.

3.CoordinationCosts—HowShouldWeAllWorkTogether?

Sowe’vefoundtherightpeopleandyou’vecontractedwiththem.Howdoyou

managethem?Throughouthiswritings,Coasediscussedcostsofcoordinating,

meshing,orotherwiseorchestratingthedifferentpeople,products,andprocesses

intoanenterprisethatcaneffectivelycreatevalue.Againsttraditional

economistswhoarguedthattherewereinternalmarketswithinfirms,Coasesaid

thatwhen“aworkmanmovesfromdepartmentYtodepartmentX,hedoesnot

gobecauseofachangeinrelativeprices,butbecauseheisorderedtodoso.”

Inotherwords,marketsallocateresourcesviathepricemechanism,butfirms

allocateresourcesviaauthoritativedirection.

Williamsonwentontoexplainthattherearetwosignificantcoordinating

systems.Firstisthepricesystemfordecentralizedresourceallocationneedsand

opportunities(themarket).Butsecond,(traditional)“firmsemployadifferent

organizingprinciple—thatofhierarchy—whereuponauthorityisusedtoaffect

resourceallocation.”Overthelastfewdecades,hierarchieshavecomeunder

scrutinyasstructuresforkillingcreativity,undermininginitiative,

disempoweringhumancapital,andscapegoatingresponsibilitythroughopacity.

Tobesure,manymanagementhierarchieshavebecomeunproductive

bureaucracies.However,hierarchyasaconcepthasgottenabadrap,ashasits

mosteloquentdefender,Canadian-bornpsychologistElliotJaques.Inaclassic

1990HarvardBusinessReviewarticle,Jaquesargued,“35yearsofresearch

haveconvincedmethatmanagerialhierarchyisthemostefficient,thehardiest,

andinfactthemostnaturalstructureeverdevisedforlargeorganizations.

Properlystructured,hierarchycanreleaseenergyandcreativity,rationalize

productivity,andactuallyimprovemorale.”

Thetroubleisthat,inrecentbusinesshistory,manyhierarchieshavenot

beeneffective,tothepointofridicule.ExhibitAisTheDilbertPrinciple,most

likelyoneofthebest-sellingmanagementbooksofalltime,byScottAdams.

Here’sDilbertonblockchaintechnologyfromarecentcartoon:

Manager:Ithinkweshouldbuildablockchain.

Dilbert:Uh-oh.Doesheunderstandwhathesaidorisitsomethinghe

sawinatrademagazinead?

Dilbert:Whatcolordoyouwantyourblockchain?

Manager:IthinkmauvehasthemostRAM.

Inthecartoon,Adamscapturesoneofthemarksofhierarchiesgonewrong

—thatmanagersoftenrisetoalevelofpowerwheretheylacktheknowledge

requiredforeffectiveleadership.

Combinedwithprogressivemanagementthinkingabouthowtobuild

effective,innovativeorganizations,thefirstgenerationoftheInternetenabled

progressivethinkingmanagerstochangethetop-downassignmentofworkand

appropriationofcredit,recognition,andpromotion.

Forbetterorforworse,centralizedhierarchiesarethenorm.

Decentralization,networking,andempowermenthavebeensensiblesincethe

earlydaysoftheInternet.Teamsandprojectshavebecomethefoundationof

internalorganization.E-mailenabledpeopletocollaborateacrossorganizational

silos.Socialmediadroppedsomecollaborationcostsinternallyanddropped

transactioncostsandmadetheboundariesofcorporationsmoreporousas

companiescouldlinkupwithsuppliers,customers,andpartnersmoreeasily.

However,today’scommercialsocialmediatoolsarehelpingmanyfirms

achievenewlevelsofinternalcollaboration.Empowerment,thereal

decentralizationofpower,isanimportantfocusinbusiness;andcompanieshave

experimentedorimplementednewconceptsrangingfrommatrixmanagementto

holacracy—withvaryingdegreesofsuccess.

Infact,thereiswidespreadagreementthatwhenfirmsdistribute

responsibility,authority,andpower,theresultwilltypicallybepositive:better

businessfunction,customerservice,andinnovation.Butthispracticeiseasier

saidthandone.

TheInternetalsohasn’tdroppedwhateconomistscall“agencycosts”—the

costofmakingsurethateverybodyinsidethefirmisactingintheowner’s

interest.Infact,anotherNobelPrize–winningeconomist(yes,theredoseemto

bealotoftheminthisstory),JosephStiglitz,arguedthatthesheersizeand

seemingcomplexityofthesefirmshaveincreasedagencycostsevenasafirm’s

transactioncostshaveplummeted.Hence,thehugepaygapbetweenCEOand

frontline.

Sowheredoesblockchaintechnologycomeinandhowcanitchangehow

firmsaremanagedandcoordinatedinternally?Withsmartcontractsand

unprecedentedtransparency,theblockchainshouldnotonlyreducetransaction

costsinsideandoutsideofthefirm,butitshouldalsodramaticallyreduce

agencycostsatalllevelsofmanagement.Thesechangeswillinturnmakeit

hardertogamethesystem.Sofirmscouldgobeyondtransactioncosttotackle

theelephantintheboardroom—agencycost.YochaiBenklertoldus,“What’s

excitingtomeaboutblockchaintechnologyisthatitcanenablepeopleto

functiontogetherwiththepersistenceandstabilityofanorganization,but

withoutthehierarchy.”

Italsosuggeststhatmanagersshouldbracethemselvesforradical

transparencyinhowtheydocoordinateandconductthemselvesbecause

shareholderswillnowbeabletoseetheinefficiencies,theunnecessary

complexity,andthehugegapbetweenexecutivepayandthevalueexecutives

actuallycontribute.Remember,managersaren’tagentsofowners;they’re

intermediaries.

4.Costsof(Re-)BuildingTrust—WhyShouldWeTrustOneAnother?

Aswehaveexplained,trustinbusinessandsocietyistheexpectationthat

anotherpartywillbehonest,considerate,accountable,andtransparent—thathe

orshewillactwithintegrity.

It’salotofworktoestablishtrust,andmany

economistsandotheracademicsarguethatwehaveverticallyintegratedfirms

becauseestablishingtrustiseasierwithincorporateboundariesthaninanopen

market.Withtrustatanall-timelow,thechallengeforfirmsisnotsimply

figuringoutwhomtotrust,buthowtogetoutsidecapabilitytotrustthem.

Indeed,economistMichaelJensenandcolleaguesmadethecasethat

integrityisafactorofproduction.Notthefirstbutamongthemosteloquenton

thetopic,theyexplainthattheseeminglynever-endingscandalsintheworldof

financewiththeirdamagingeffectsonvalueandhumanwelfarearguestrongly

fortheadditionofintegritytofinancialoperations.Tothemthisisnotanissue

ofvirtue,butanopportunityinfinancialeconomicsto“createsignificant

increasesineconomicefficiency,productivity,andaggregatehumanwelfare.”

Tothem,“Integrity...onthepartofindividualsororganizationshasenormous

economicimplications(forvalue,productivity,qualityoflife,etc.).Indeed,

integrityisafactorofproductionasimportantaslabor,capital,and

technology.”

WallStreetlosttrust(andnearlykilledcapitalism)becauseofasetof

integrityviolations.Buthasitchanged?Andwillitchange?Inthepast,

corporatesocialresponsibilityadvocatesarguedthatcompanies“dowellby

doinggood.”Wehaven’tseentheevidence.Manycompaniesdidwellbydoing

bad—byhavingbadlaborpracticesinthedevelopingworld,byexternalizing

theircostsontosocietysuchaspollution,bybeingmonopoliesandgouging

customers.Thecollapseof2008taughtusforsurethatcompanies“dobadlyby

beingbad.”Themajorbanksfoundthisoutthehardway.Priorto2008many

weremakingupwardsof20percentreturnonequity.Formanytodayitiswell

below5percent,withsomenotevenmakingtheircostofcapital.Froma

shareholderperspective,theyshouldnolongerexist.

Whatarethechances,realistically,thatWallStreetwillwakeuptoJensen’s

exhortationsandactwithintegrity?Surely,expedienceandshort-termgainare

codedintotheDNAoftheWesternfinancialsystem.

Enterblockchaintechnologyanddigitalcurrencies.Whatifpartiesdidn’t

havetotrustoneanother,butcouldstillactwithhonesty,accountability,

consideration,andtransparencybecauseitwasthefoundationofthe

technologicalplatformoffinance?

SteveOmohundrogaveusacompellingexample.“Ifsomebodyfrom

NigeriawantstobuysomethingthatI’mselling,I’mgoingtobeveryskeptical,

I’mnotgoingtoacceptacreditcardoracheckfromNigeria.Withthenew

platform,IknowIcantrustitandIdon’thavetoincurthecostsofestablishing

trust.Soitenablestransactionswhichsimplycouldn’thappenotherwise.”

SoWallStreetbanksdon’thavetospliceintegrityintotheirDNAand

behavior;thefoundersofblockchainshavecodeditintotheirsoftwareprotocols

anddeployeditacrossthenetwork—enablinganewutilityforthefinancial

servicesindustry.Thegoodnewsisthattheindustrycanreestablishtrustand

maintainitinanongoingway.

Withblockchaintechnologycausingthecostsofsearching,contracting,

coordinating,andcreatingtrusttoplummet,itshouldbeeasierforfirmsnotjust

toopenup,butalsotoforgetrustingrelationshipswithexternalparties.Acting

inone’sself-interestserveseverybody’sinterests.Cheatingthesystemcosts

morethanusingitasdesigned.

Thisisnottosaythatcorporatebrandsorforthatmatteractingethicallyis

unimportantornolongerrequired.Blockchainhelpsensureintegrityand

thereforetrustintransactionsbetweenpeers.Italsohelpsachievetransparency

—acriticalfactorintrust.However,asauthorandtechnologytheoristDavid

Ticollsays:“Trustandbrandareaboutmorethanvouchsafingatransaction.

Theyarealsoaboutquality,enjoyment,safetyofadeviceorservice,cachetand

coolness.Intoday’sCOP21world,thebestbrandstransparentlyandverifiably

signifyoutcomesthatareenvironmentally,socially,andeconomically

responsible.”

Still,throughsmartcontracts,executivescanbeheldaccountable—they

mustabidebytheircommitmentsasenforcedandsettledbysoftware.

Companiescanprogramrelationshipswithradicaltransparencysoeveryonehas

abetterunderstandingaboutwhateachpartyhassigneduptodo.Andoverall,

likeitornot,theymustconductbusinessinawaythatisconsiderateofthe

interestsofotherparties.Theplatformdemandsit.

DETERMININGCORPORATEBOUNDARIES

Overall,theboundariesthatseparateacompanyfromitsvendors,consultants,

customers,externalpeercommunities,andotherswillbecomehardertodefine.

Perhapsasimportant,theywillconstantlychange.

Firmswillstillexist,blockchainnotwithstanding,becausethemechanisms

forsearching,contracting,coordinating,andestablishingtrustwithincorporate

boundarieswillbemorecost-effectivethanthoseintheopenmarket,atleastfor

manyactivities.Theideaoftheso-calledfreeagentnation,whereindividuals

executeworkoutsidetheboundariesofcorporations,isillusory.MelanieSwan,

whofoundedtheInstituteforBlockchainStudies,said,“What’stherightsizeof

thecorporationforoptimaltransactibility?Well,it’snotaunitarything,of

peopleworkingonlyasindividualsore-lancers.”Toher,therewillbenewkinds

of“flexiblebusinessentitiesofindividualsandgroupspartneringaround

projects.”Sheviewsthenewmodelofthefirmmoreliketheguild,the

preindustrialassociationsofmerchantsortradesmenwhoworkedtogetherina

particulartown.“Westillneedorganizationsactingascoordinatingmechanisms.

Butthenewmodelsofteamcollaborationarenotyetfullyclear.”

Todayweoftenhearthatfirmsshouldfocusontheircore.Butwhen

consideringhowblockchaintechnologydropstransactioncosts,whatiscore?

Andhowdoyoudefinethatwhenacompany’scoreisconstantlychanging?

Itseemsthateveryonehasadifferentdefinitionofwhattheoptimalfirmsize

shouldbetomaximizeproductivityandcompetitiveadvantage.Manyfirmswe

examineddidn’thaveaclearview,seemingtochoosetheBobDylanapproach

todeterminingwhat’sinandwhatshouldbeout(“Youdon’tneedaweatherman

toknowwhichwaythewindblows”).Back-officeprocessing,forexample,was

describedasano-brainer,withoutanyclearcriteriaastowhy.

Somearemorerigorous.Fromthecorecompetenciesviewdevelopedby

GaryHamelandC.K.Prahalad,firmsgaincompetitiveadvantagethrough

competencemastery.Thosecompetenciesmasteredarecentraltothefirm,while

otherscanbeacquiredfromoutside.

However,afirmmayhavemasteryover

someactivitiesthatarenotmissioncritical.Shouldtheystillbekeptinside?

StrategistMichaelPorterhasanimplicitviewthatcompetitiveadvantage

stemsfromactivities,inparticularfromnetworksofreinforcingactivitiesthat

arehardtoreplicateintheirtotality.It’snottheindividualpartsofthebusiness

thatmatter,buthowtheyarestrungtogetherandbuilttoreinforceoneanotherin

auniqueactivitysystem.Competitiveadvantagecomesfromtheentiresystem

ofactivities;whileanyindividualactivitywithinthesystemmaybecopied,

competitorscannotproducethesamebenefitunlesstheymanagetoduplicatethe

entiresystem.

Othersarguethatcompaniesshouldalwaysretainfunctionsorcapabilities

thataremissioncritical—thosethatfirmsmustabsolutelygetrightforsurvival

andsuccess.Butmakingcomputersismissioncriticalforcomputercompanies;

yetDell,HP,andIBMoutsourcemuchofthisactivitytoelectronics

manufacturingservicescompanieslikeCelestica,Flextronics,orJabil.Final

assemblyofvehiclesismissioncriticalforanautomanufacturer;yetBMWand

MercedescontractwithMagnatodothisactivity.

StanfordGraduateSchoolofBusinessprofessorSusanAtheyargues

persuasively:“Theremaybesomemission-criticalfunctions,likethecollection

andanalysisofbigdata,thatarejusttooriskytomoveoutsidecorporate

boundaries,evenifyoudon’thaveuniqueabilitiesinthatarea.”

True,there

maybesomefunctionslikedataanalyticswheresurvivaldependsonbeing

uniquelygood,andtheremaybeexistentialrisksofpartnering.Still,external

resourcescanbedeployedstrategicallytobuildinternalcapability.

Ourviewisthatthestartingpointforcorporateboundarydecisionsisto

understandyourindustry,competitors,andopportunitiesforprofitablegrowth—

andusethisknowledgeasthebasisfordevelopingabusinessstrategy.From

there,theblockchainopensupnewopportunitiesfornetworkingthatevery

managerandknowledgeworkerneedstoconsideratalltimes.Boundarychoices

arenotsimplyforseniorexecutives,theyareforanyonewhocaresabout

marshalingthebestcapabilityforinnovationandhighperformance.Weshould

add—andthisisnosmallpoint—thatyoucan’toutsourceyourcorporateculture.

EntertheMatrix

Takingintoaccounthowblockchaintechnologycanenableaccesstounique

capabilitiesoutsidecorporateboundaries,firmscannowdefinethosebusiness

activitiesorfunctionsthatarefundamentaltocompetitiveness—thatareboth

missioncriticalandalsouniqueenoughtoensuredifferentiatedvalue.



However,thisIn-OutMatrixisjustastartingpointfordefiningcorporate

boundariesatanygivenpoint.Whatotherfactorsshouldfirmsconsiderin

determiningwhatisfundamental?Whatextenuatingcircumstancesaretherethat

mightaffectchoicestooutsourceornurtureinternally?

HackingYourFuture:BoundaryDecisions

Whenmakingboundarychoices,firmsshouldstartusingtheblockchainto

marshala360-degreeviewandreachconsensusonwhatisuniqueandwhatis

missioncriticalintheirbusiness.Let’sreturntoJoeLubinandConsenSys,as

theyforeshadowthemodusoperandioftheblockchain-basedenterprise.

RememberthatConsenSysisinitsinfancy,andmuchcangowrongto

undermineitsbusiness.Wecanstilllearnfromthiscompany’sexample.

1.Aretherepossiblepartnerswhocoulddotheworkbetter?In

particular,couldwebenefitfromharnessingnewpeerproduction

communities,ideagoras,openplatforms,andotherblockchainbusiness

models?ThecompanyConsenSysisabletoorchestrateextraordinary

expertisetodoitswork,eventhoughmanyareoutsideitsboundaries.

2.Givenblockchaintechnology,whataretheneweconomicsof

corporateboundaries—thetransactioncostsofpartnering,versus

keeping/developingin-house?Canyoudevelopasuiteofsmart

contractswhosecoreelementsaremodularandreusable?ConsenSys

usessmartcontractstoreducecoordinationcosts.

3.Whatistheextentoftechnologicalinterdependenceversus

modularity?Ifyoucandefinebusinesscomponentsthataremodular,

thenyoucaneasilyreconfigurethemoutsidecorporateboundaries.

ConsenSyssetsstandardsforsoftwaredevelopmentandprovidesaccess

tovarioussoftwaremodulesthatitspartnerscanbuildupon.

4.Whatareyourfirm’scompetencieswithregardtothemanagingof

outsourcedwork?Cansmartcontractsenhancethosecompetenciesand

lowercosts?Fromtheget-go,ConsenSyswasablockchainbusiness.

CEOJoeLubinembracesthetechnologyandamodifiedholacracy,and

wecanseethesevendesignprinciplesatwork.

5.Whataretherisksofopportunismwhereapartnermightencroachon

fundamentalpartsofyourbusiness,assomehavesuggestedFoxconn

maydotosmartphonecompanies?ConsenSystriestomitigatethis

challengebybuildingloyaltythroughincentivestructureswherebyits

talentsharesinthewealththeycreate.

6.Aretherelegal,regulatory,orpoliticalobstaclestodeepernetworking

(andshrinking)oftheorganization?NotaproblemforConsenSysyet.

7.Speedandpaceofinnovationareimportanttoboundarydecisions.

Sometimesfirmshavenochoicebuttopartnerforastrategicfunction

becausetheycannotdevelopitin-housefastenough.Apartner

arrangementcanbeaplaceholder.Willpartneringhelpusbuildan

ecosystemthatwillimproveourcompetitiveadvantage?Thisis

ConsenSys’sstrategy:buildanetworkofcollaboratorsaroundthe

Ethereumplatform,growtheplatformandecosystem,andincreasethe

probabilityofsuccessforallcomponents.

8.Isthereadangeroflosingcontrolofsomethingfundamental—for

example,aproductornetworkarchitecture?Firmsmusthaveasenseof

whichpartsofthevaluechainwillbekeytocreatingandcapturing

valueinthefuture.Ifthesearefarmedout,thefirmwilllose.The

EthereumplatformprovidesabasicarchitectureforConsenSys.

9.Isthereacapability,liketheexploitationofdataassets,thatmustbe

partofthefabricofyourenterpriseandallitsoperations?Even

thoughyoulackauniquecapability,youshouldviewpartneringasa

transitionaltactictodevelopextraordinaryinternalexpertiseand

capacity.Blockchaintechnologieswillintroduceanewsetof

capacitiesthatneedtoresideinthecraniumofeveryemployee.You

can’tmovecultureoutsideyourboundaries.

CHAPTER5



NEWBUSINESSMODELS:

MAKINGITRAINONTHEBLOCKCHAIN

oundedamonthbeforethemarketcrashedin2008,Airbnbhasbecomea

$25billionplatform,nowtheworld’slargestsupplierofroomsasmeasured

bymarketvalueandroomsoccupied.Buttheprovidersofroomsreceiveonly

partofthevaluetheycreate.InternationalpaymentsgothroughWesternUnion,

whichtakes$10ofeverytransactionandbigforeignexchangeoffthetop.

Settlementstakealongtime.Airbnbstoresandmonetizesallthedata.Both

rentersandcustomersalikehaveconcernsaboutprivacy.

WebrainstormedwithblockchainexpertDinoMarkAngaritistodesignan

Airbnbcompetitorontheblockchain.Wedecidedtocallournewbusiness

bAirbnb.Itwouldlookmorelikeamember-ownedcooperative.Allrevenues,

exceptforoverhead,wouldgotoitsmembers,whowouldcontroltheplatform

andmakedecisions.

BAIRBNBVERSUSAIRBNB

bAirbnbisadistributedapplication(DApp),asetofsmartcontractsthatstores

dataonahome-listingsblockchain.ThebAirbnbapphasanelegantinterface:

ownerscanuploadinformationandpicturesoftheirproperty.

Theplatform

maintainsreputationscoresofbothprovidersandrenterstoimproveeveryone’s

businessdecisions.

Whenyouwanttorent,thebAirbnbsoftwarescansandfiltersthe

blockchainforallthelistingsthatmeetyourcriteria(e.g.,tenmilesfromthe

EiffelTower,twobedrooms,four-plusstarratingsonly).Youruserexperienceis

identicaltothatinAirbnb,exceptthatyoucommunicatepeertopeeronthe

network,throughencryptedandcryptographicallysignedmessagesnotstoredin

Airbnb’sdatabase.

Youandtheroomowneraretheonlytwopeoplewhocan

readthesemessages.Youcanswapphonenumbers,anexchangethatAirbnb

blockstopreservefuturerevenues.OnbAirbnbyouandtheownercould

communicateoff-chainandcompletethetransactionentirelyoff-chain,butyou

arebetteroffcompletingthetransactionon-chainforafewreasons.

Reputation:Becausethenetworkrecordsthetransactionontheblockchain,

apositivereviewfromeachuserimprovesyourrespectivereputations.Therisk

ofanegativereviewmotivateseachpartytoremainhonest.Remember,people

withgoodreputationscanusethesamepersonaacrossmultipleDAppsand

benefitfromcontinuityasagoodperson.

IdentityVerification:Becausewearenotdealingwithacentralizedsystem

thatchecksIDonourbehalf,eachpartyneedstoconfirmtheotherparty’s

identity.Theblockchaincallsupacontractfroma“VerifyID”application,oneof

manycontractsthatbAirbnb,SUber(blockchainUber),andotherDAppsuseto

verifyreal-worldidentity.

PrivacyProtection:VerifyIDdoesn’ttrackandstorealltransactionsina

database.ItsimplyreturnsaTRUEorFALSEwhenitreceivesarequestfor

verificationofapublickey(persona).DifferentkindsofDAppscancall

VerifyID,butVerifyIDneverknowsdetailsoftransactions.Thisseparationof

identityfromactivitygreatlyimprovesyourprivacy.

RiskReduction:Homeownerscurrentlystorecustomeridentitiesand

financialdataontheirownservers,whichcanbehackedandleaked,exposing

ownerstolitigationandlargeliabilities.Ontheblockchain,youneedn’ttrusta

vendorwithyourdata;thereisnocentraldatabasetohackandleak.Thereare

onlyindividualpeer-to-peerpseudonymoustransactions.

Insurance:TodayAirbnboffers$1millioninsuranceforownersand

compensatesthemfortheftanddamage.OnbAirbnb,ownerscangetthe

bAirbnbinsuranceDApp.Renterswithgoodreputationslikeyouhavelower

insuranceratesandneedn’tsubsidizerenterswholackcaution,scrutinyof

prospects,orpoortreatmentofproperty.Whenyousubmitabookingrequest,

bAirbnbsendsyourpublickey(persona)totheinsurancecontractforaquote.

TheinsuranceDAppcontactsalistoftrustedproviders;fakeinsurersneednot

apply.Insurersperformtheirowncalculationsinrealtimethroughautonomous

agentsoftwarebasedontheinputstothecontract—suchasthemarketvalueof

theowner’shouse,howmuchtheownerwantsinsured,ownerreputation,your

reputationasarenter,andrentalprice.bAirbnbtakesthebestbidandaddsitto

thenightlyfeetheownerwantstocharge.Theblockchainprocessesthis

calculationinthebackground;ownersandrentershaveacomparableuser

experiencetothatofAirbnbbutasuperiorandmoreequitablevalueexchange.

PaymentSettlement:Ofcourse,ontheblockchain,youtransferfundsto

theownerinseconds,notdaysaswithAirbnb.Ownerscanmanagesecurity

depositsmoreeasilywithsmartcontracts.Somepartiesuseescrowaccountsto

releasepaymentspartially(nightly,weekly,hourly,etc.)orinfullastheparties

agree.Indisputesinvolvingsmartcontracts,partiescancallforarbitration.

PropertyAccessUsingSmartLocks(IoTdevice):Asmartlockconnected

totheblockchainknowswhenyouhavepaid.Whenyouarrive,yournear-field

communication-enabledsmartphonecansignamessagewithyourpublickeyas

proofofpayment,andthesmartlockwillopenforyou.Ownersneednotdrop

keysofftoyouorvisitthepropertyunlesstheywanttosayhellooraddress

someemergency.

Youandtheownerhavenowsavedmostofthe15percentAirbnbfee.

Settlementsareassuredandinstant.Therearenoforeignexchangefeesfor

internationalcontracts.Youneednotworryaboutstolenidentity.Local

governmentsinoppressiveregimescannotsubpoenabAirbnbforallitsrental

historydata.Thisistherealsharing-of-valueeconomy;bothcustomersand

serviceprovidersarethewinners.

GLOBALCOMPUTING:THERISEOFDISTRIBUTED

APPLICATIONS

BeforeweexaminetheotherpossibledistributedbusinessentitieslikebAirbnb,

awordonhowtheunderlyingtechnologyenablesdecentralization.Untilthe

blockchain,centralizedorganizationshaveheldconcentratedcomputingpower.

Inthefirstdecadesofenterprisecomputing,allsoftwareapplications(apps)

ranonthecomputersoftheirowners.GM,Citibank,U.S.Steel,Unilever,and

theU.S.federalgovernmentownedhugedatacentersthatranproprietary

software.Companiesrentedor“timeshared”computerpowerfromproviders

likethe1980sgiantCompuServetoruntheirownapplications.

Asthepersonalcomputermatured,thesoftwaremarketspecialized:some

developedclientapps(thePC)andsome,serverapps(ahostcomputer).With

widespreadadoptionoftheInternet,specificallytheWorldWideWeb,

individualsandcompaniescouldusetheircomputerstoshareinformation—

initiallyastextdocumentsandlaterasimages,videos,othermultimediacontent,

andeventuallysoftwareapps.

Sharingbegantodemocratizetheinformation

landscape.Butitwasshort-lived.

Inthe1990s,anewvariantoftime-sharingappeared,initiallycalledvirtual

privatenetworks(VPNs)andthencloudcomputing.Cloudcomputingenabled

usersandcompaniestostoreandprocesstheirsoftwareanddatainthird-party

datacenters.NewtechnologycompanieslikeSalesforce.combuiltfortunesby

harnessingthecloudmodeltosavecustomersthebigcostsofdevelopingand

runningtheirownsoftware.CloudserviceproviderslikeAmazonandIBMbuilt

ginormousmultibillion-dollarbusinesses.Duringthe2000s,socialmedia

companieslikeFacebookandGooglecreatedservicesthatranontheirownvast

datacenters.Andtocontinuethistrendofcentralizedcomputing,companieslike

ApplemovedawayfromtheWeb’sdemocratizingarchitecturetoproprietary

platformsliketheAppleStorewherecustomersacquiredproprietaryapps,not

ontheopenWebbutinexclusivewalledgardens.

Againandagaininthedigitalage,largecompanieshaveconsolidated—

created,processed,andownedoracquired—applicationsontheirownlarge

systems.Centralizedcompanieshavebegottencentralizedcomputing

architecturesthathave,inturn,centralizedtechnologicalandeconomicpower.

Someredflags:Withsinglepointsofcontrol,companiesthemselvesare

vulnerabletocatastrophiccrashes,fraud,andsecuritybreaches.Ifyouwerea

customerofTarget,eBay,JPMorganChase,HomeDepot,orAnthem,orforthat

matterAshleyMadison,theU.S.OfficeofPersonnelManagement(second

breach!),andevenUber,youfeltthepainofhackingin2015.

Systemsof

differentpartsofacompanystillhavebigchallengescommunicatingwithone

another,letalonewithsystemsoutsidethefirm.Forususers,itmeansthat

we’veneverreallyhadcontrol.Othersdefineourserviceswiththeirimplicit

valuesandgoalsthatmayconflictwithours.Aswegeneratereamsofvaluable

data,othersownitandarebuildingvastfortunes—perhapsthegreatestin

history—whilemostofusreceivelittlebenefitorcompensation.Worstofall,

centralpowersareusingourdatatocreatemirrorimagesofeachofusandmay

usethesetosellusstuffortospyonus.

Alongcomesblockchaintechnology.Anyonecanuploadaprogramonto

thisplatformandleaveittoself-executewithastrongcryptoeconomical

guaranteethattheprogramwillcontinuetoperformsecurelyasitwasintended.

Thisplatformispublic,notinsideanorganization,anditcontainsagrowingset

ofresourcessuchasdigitalmoneytoincentandrewardcertainbehavior.

We’removingintoanewerainthedigitalrevolutionwherewecanprogram

andsharesoftwarethat’sdistributed.Justastheblockchainprotocolis

distributed,adistributedapplicationorDApprunsacrossmanycomputing

devicesratherthanonasingleserver.Thisisbecauseallthecomputing

resourcesthatarerunningablockchainconstituteacomputer.Blockchain

developerGavinWoodmakesthispointdescribingtheEthereumblockchainasa

platformforprocessing.“ThereisonlyoneEthereumcomputerintheworld,”he

said.“It’salsomultiuser—anyonewhoeverusesitisautomaticallysignedin.”

BecauseEthereumisdistributedandbuilttothehigheststandardsof

cryptosecurity,“allcode,processing,andstorageexistswithinitsown

encapsulatedspaceandnoonecanevermesswiththatdata.”Hearguedthat

criticalrulesarebuiltintothecomputer,comparingitto“virtualsilicon.”

AsforDApps,therehavebeenwarm-upactspriortoblockchains.

BitTorrent,thepeer-to-peerfile-sharingapp,demonstratesthepowerofDApps

asitcurrentlyconsumesover5percentofallInternettraffic.

Loversofmusic,

film,andothermediasharetheirfilesforfree,withnocentralserverfor

authoritiestoshutdown.IconoclasticprogrammerBramCohen,who

incidentallyislessthanenthusiasticaboutbitcoinbecauseofallthecommercial

activityaroundit,developedBitTorrent.“Therevolutionwillnotbemonetized,”

hesaid.

Mostofusthinkthatgeneratingrevenueandeconomicvaluethrough

technologicalinnovationispositive,aslongastherevolutionisnotmonetized

bythefew.WithblockchaintechnologythepossibilitiesforDAppsarealmost

unlimited,becauseittakesDAppstoanewlevel.If,asthesongsays,“Loveand

marriage,loveandmarriage,gotogetherlikeahorseandcarriage,”thensodo

DAppsandblockchains.ThecompanyStorjisadistributedcloudstorage

platformandasuiteofDAppsthatallowuserstostoredatasecurely,

inexpensively,andprivately.Nocentralizedauthorityhasaccesstoauser’s

encryptedpassword.Theserviceeliminatesthehighcostsofcentralizedstorage

facilities;it’ssuperfast;anditpaysusersforrentingtheirextradiskspace.It’s

likeAirbnbforyourcomputer’ssparememoryspace.

THEDAPPKINGS:DISTRIBUTEDBUSINESSENTITIES

HowdoDAppsinfusegreaterefficiency,innovation,andresponsivenessintothe

structureofthefirm?WhatnewbusinessmodelscanwemakewithDAppsto

generatevalue?Andifpowerfulinstitutionsarecapturingthebenefitsofthe

Internettoday,howcanwemovebeyond“outsourcing”and“businesswebs”to

trulydistributedmodelsofinnovationandvaluecreationthatcandistribute

prosperityandtheownershipofdataandwealth?Wemappedwhatwebelieveto

bethefourmostimportantinnovationsontoatwo-by-twomatrix.

TheY-axisidentifiesthedegreetowhichhumansparticipateinthemodel.

Attheleft,themodelrequiressomehumaninvolvement.Attheright,themodel

requiresnopeople.

TheX-axisdescribesthefunctionalcomplexityofthemodel,notits

technicalcomplexity.Atthelowerendaremodelsthatperformasinglefunction.

Atthetoparemodelsthatperformdiversefunctions.

Theseareallcomponentsoftheblockchaineconomybecausetheyuse

blockchaintechnologyandoftencryptocurrenciesastheirfoundation.Smart

contracts(discussedinthelastchapter)arethemostbasicform:theyinvolve

somecomplexitythatrequireshumaninvolvement,increasinglyintheformof

multisignatureagreements.Assmartcontractsgrowincomplexityand

interoperatewithothercontracts,theycancontributetowhatwecallopen

networkedenterprises(ONEs).IfwecombineONEswithautonomousagents—

softwarethatmakesdecisionsandactsonthemwithouthumanintervention—we

getwhatwe’recallingadistributedautonomousenterprisethatrequireslittleor

notraditionalmanagementorhierarchytogeneratecustomervalueandowner

wealth.Andwethinkthatverylargenumbersofpeople,thousandsormillions,

mightbeabletocollaborateincreatingaventureandsharinginthewealthit

creates—distributing,ratherthanredistributing,wealth.

OpenNetworkedEnterprises

Atverylowcost,smartcontractsenablecompaniestocraftclever,self-enforcing

agreementswithpreviouslyimprobableclassesofnewsuppliersandpartners.

Whenaggregated,smartcontractscanmakefirmsresemblenetworks,rendering

corporateboundariesmoreporousandfluid.

BlockchaintechnologyalsodropsCoase’ssearchcostsandcoordination

costssothatcompaniescandisaggregateintomoreeffectivenetworks.Anauto

companycouldcheckasupplier’strustworthinessbyjustscanningtheanalytic

servicesonline.Soon,justtype“axle”or“windowglass”intoanynumberof

industryexchangesontheblockchainandnegotiatethepriceonline.

Wecanextendthatsimplescenariotofindingareplacementpart,asupply

chainpartner,acollaborator,orapieceofsoftwareformanagingadistributed

resource.NeedsteelfromChina,rubberfromMalaysia,orglassfromWichita,

Kansas?Noproblem.DecentralizedonlineclearinghousesoperatingasDApps

foreachcommoditywillenablepurchaserstocontractforprice,quality,and

deliverydateswithafewclicksofamouse.You’llhaveadetailedsearchable

recordofprevioustransactions—notjusthowvariouscompanieswereratedbut

preciselyhowtheyhonoredtheircommitments.Youcantrackeachshipmenton

avirtualmapthatshowsitspreciselocationinthejourney.Youcan

microschedulegoodstoshowupjustintime.Nowarehouserequired.

AUTONOMOUSAGENTS

ImagineapieceofsoftwarethatcouldroamtheInternetwithitsownwalletand

itsowncapacitytolearnandadapt,inpursuitofitsgoalsdeterminedbya

creator,purchasingtheresourcesitrequirestosurvivelikecomputerpower,all

whilesellingservicestootherentities.

Thetermautonomousagenthasmanydefinitions.

Forourdiscussion,itisa

deviceorsoftwaresystemthatonbehalfofsomecreatortakesinformationfrom

itsenvironmentandiscapableofmakingindependentchoices.Wecould

describesomeautonomousagentsas“intelligent”althoughtheylackgeneral

intelligence.However,theyarenot“justcomputerprograms”becausetheycan

modifyhowtheyachievetheirobjectives.Theycansenseandrespondtotheir

environmentovertime.

Thecomputervirusisthemostcitedexampleofanautonomousagent;the

virussurvivesbyreplicatingitselffrommachinetomachinewithoutdeliberate

humanaction.Unleashingavirusontheblockchaincouldbemoredifficultand

certainlycostlybecauseitwouldlikelyhavetopaytheotherpartytointeract

withit,andthenetworkwouldquicklyidentifyitspublickey,crashits

reputationscore,ornotvalidateitstransactions.

Forpositiveblockchainexamples,considerthefollowing.Acloud

computingservicerentsprocessingpowerfromvarioussources,growingto

Amazon’ssizebymakingrentaldealswithothercomputersthathaveexcess

capacity.

Adriverlesscarownedbyacommunity,company,individual,or

perhapsitselfmovesaroundthecitypickingupanddroppingoffpassengersand

chargingthemappropriatefees.We’reinterestedinagentsthatcando

transactions,acquireresources,makepayments,orotherwiseproducevalueon

behalfoftheircreator.

VitalikButerin,whocreatedtheEthereumblockchain,hastheorizedabout

theseagentsanddevelopedataxonomytodescribetheirevolution.Atoneend

aresingle-functionagentslikevirusesthatgoaboutworkingtoachievetheir

limitedgoals.Nextuparemoreintelligentandversatileagents,say,aservice

thatwouldrentserversfromaspecificsetofproviderslikeAmazon.Amore

sophisticatedagentmightbeabletofigureouthowtorentaserverfromany

providerandthenuseanysearchenginetolocatenewWebsites.Anevenmore

capableagentcouldupgradeitsownsoftwareandadapttonewmodelsofserver

rentalsuchasofferingtopayendusersforrentaloftheirunusedcomputersor

disks.Thepenultimatestepconsistsofbeingabletodiscoverandenternew

industries,leadingintothenextevolutionofthespecies—fullartificial

intelligence.

Weathernet

Couldanautonomousagentuseblockchaintechnologytomakemoney

forecastingtheweather?Flash-forwardto2020.Thebestweatherforecasts

globallyarecomingfromanetworkofsmartdevicesthataremeasuringand

predictingtheweatherallaroundtheworld.Thatyear,anautonomousagent

namedBOBisreleasedontothisnetworktocollaboratewiththesedevicesto

createabusiness.Here’showBOBworks.

Distributedenvironmentalsensors(weatherNodes)onutilitypoles,in

people’sclothes,onroofsofbuildings,travelingincars,andlinkedtosatellites

areallconnectedinaglobalmeshnetwork.NoneedforanInternetservice

providerforconnectivity.Ratherthancommunicatingwithacentraldatabase,

theystoretheirdataonablockchain.

Manyaresolarpoweredandsothey

don’tneedtheelectricalgrid;theycaneffectivelyoperateindefinitely.

Theblockchainhandlesafewfunctions.First,itsettlespayments.Asan

incentive,eachweatherNodereceivesamicropaymenteverythirtysecondsfor

providingaccurateweathertelemetry(temperature,humidity,wind,etc.)ata

particularlocationintheworld.

TheblockchainalsostoresallweatherNodetransactions.EachweatherNode

signsallofitsdatawithitspublickeystoredontheblockchain.Apublickey

identifiestheweatherNodeandallowsotherentitiestodetermineitsreputation.

Whenthenodeproducesaccurateweatherdata,itsreputationisenhanced.Ifa

nodeisbrokenorcompromisedandproducesinaccuratedata,itlosesstatus.

Nodeswithlowreputationreceivelessbitcointhannodeswithhighreputation—

thebeneficiarybeingthecreatoroftheapp—whetheranindividual,company,or

cooperative.

Theblockchainalsoallowsdataprovidersanddataconsumerstoparticipate

peertopeeronasingle,opensystem,ratherthansubscribetodozensof

centralizedweatherservicesaroundtheworld,andprogramtheirsoftwareto

communicatewitheachoftheirapplicationprogramminginterfaces(APIs).

Withsmartcontractswecanhaveaglobal“WeatherDataMarketplaceDApp”

whereconsumersbidfordatainrealtimeandreceivethedatainauniversally

agreed-uponformat.Centralizeddataproviderscanditchtheirproprietary

systemsandindividualizedsalesefforts,andinsteadbecomedataprovidersfor

thegloballyaccessibleWeatherDataMarketplaceDApp.

WeatherDApp:SensorsLP

InthefirsteraoftheInternet,technicalinnovationoccurredonlyinthecenter;

centralizedutilitieslikeenergycompanies,cablecorporations,andcentralbanks

decidedwhentoupgradethenetwork,whentosupportnewfeatures,andwhom

togiveaccess.Innovationcouldn’toccuratthe“edges”(i.e.,individualsusing

thenetwork)becausetherulesandprotocolsofclosedsystemsmeantthatany

newtechnologiesdesignedtointeractwiththenetworkwouldneedthecentral

power’spermissiontooperateonit.

Butcentralpowersareinefficientbecausetheydon’tknowexactlywhatthe

marketwantsinrealtime.Theyhavetomakeeducatedguessesthatarealways

lessaccuratethanwhatreal-timemarketsdemand.Weendupwith

WeatherCorp,acentralizedservicethatinstallssensorsandputsupsatellitesso

thatitcansellsubscriptionstodatathatfewpeoplemaywant.

Theblockchainallowsanyentitytobecomeaweatherproviderorweather

dataconsumer,withverylowbarrierstoentry.JustbuyaweatherNode,putiton

yourroof,andconnectittotheGlobalWeatherDataMarketplaceDAppLP(for

linkedpeers)andyou’llstartearningincomerightaway.Andifyoucanrigyour

ownrooftopweatherNodethathappenstoprovidemoreaccuratedata,well,

goodforyou!Youinnovatedontheedge,andthemarketrewardsyouforit.The

incentivesforinnovationonopennetworksarealignedtoincreaseefficiency

betterthanclosednetworks.

DuelingBots

Whataboutconflictsofinterest?IftheweatherNodestartedexpandingits

capabilityandenteredthecropinsurancemarketplace,wouldn’tithave

cognitivedissonance?FarmerweatherNodeswanttoemphasizetheimpactof

droughts,andinsurerweatherNodesclaimdroughtsareminimal.Theowners

anddesignersofagentsneedtransparencyofoperations.Ifbotharefiltering

sensordatathroughabiasedscreen,thentheirrespectivereputationswilldrop.

VitalikButerinpointsoutthatautonomousagentsarechallengingtocreate,

becausetosurviveandsucceedtheyneedtobeabletonavigateina

complicated,rapidlychanging,orevenhostileenvironment.“IfaWebhosting

providerwantstobeunscrupulous,theymightspecificallylocateallinstancesof

theservice,andthenreplacethemwithnodesthatcheatinsomefashion;an

autonomousagentmustbeabletodetectsuchcheatingandremoveoratleast

neutralizecheatingnodesfromthesystem.”

Notethatautonomousagentsalsoseparatepersonhoodfromassetownership

andcontrol.Beforeblockchaintechnology,allassets—land,intellectual

property,money—requiredapersonorlegalorganizationofpeopletoownit.

AccordingtoAndreasAntonopoulos,cryptocurrenciescompletelyignore

personhood.“Awalletcouldbecontrolledbyapieceofsoftwarethathasno

ownershipandsoyouhavethepossibilityofcompletelyautonomoussoftware

agentsthatcontroltheirownmoney.”

AnautonomousagentcouldpayforitsownWebhostinganduse

evolutionaryalgorithmstospreadcopiesofitselfbymakingsmallchangesand

thenallowingthosecopiestosurvive.Eachcopycouldcontainnewcontentthat

itdiscoversorevencrowdsourcessomewhereontheInternet.Assomeofthese

copiesbecomeverysuccessful,theagentcouldselladsbacktousers,adrevenue

couldgointoabankaccountorpostedonasecureplaceontheblockchain,and

theagentcouldusethisgrowingrevenuetocrowdsourcemoreadcontentand

proliferateitself.Theagentwouldrepeatthecyclesothatappealingcontent

propagatesandhostsitselfsuccessfully,andunsuccessfulcontentbasicallydies

becauseitrunsoutofmoneytohostitself.

DISTRIBUTEDAUTONOMOUSENTERPRISES

WenowsuggestyoubuckleupinyourStarTrekcaptain’sseatforamoment.

ImagineBOB9000—asetofautonomousagentsthatcooperateinacomplex

blockchain-basedecosystemaccordingtoamissionstatementandrules.

Togethertheycreateasuiteofservicesthattheyselltohumansororganizations.

Humansanimatetheagents,endowingthemwithcomputingpowerandcapital

togoabouttheirwork.Theybuytheservicestheyneed,hirepeopleorrobots,

acquirepartnerresourcessuchasmanufacturingcapabilityandbrandingand

marketingexpertise,andadaptinrealtime.

Thisorganizationcouldhaveshareholders,possiblymillionsofthemwho

participatedinacrowdfundingcampaign.Theshareholdersprovideamission

statement,say,tomaximizeprofitlawfully,whiletreatingallstakeholderswith

integrity.Shareholderscouldalsovoteasrequiredtogoverntheentity.As

opposedtotraditionalorganizations,wherehumansmakealldecisions,inthe

ultimatedistributedorganizationmuchoftheday-to-daydecisionmakingcanbe

programmedintoclevercode.Intheory,atleast,theseentitiescanrunwith

minimalornotraditionalmanagementstructure,aseverythingandeveryone

worksaccordingtospecificrulesandprocedurescodedinsmartcontracts.There

wouldbenoovercompensatedCEO,management,orcorporatebureaucracy,

unlesstheentitydecidedtohireandbuildone.Therewouldbenoofficepolitics,

noredtape,noPeterPrincipleoftheDilbertianenterpriseatwork,because

technologyproviders,opensourcecommunities,orenterprisefounderswould

setthesoftware’sagendatoexecutespecificfunctions.

Anyhumanemployeesorpartnerorganizationswouldperformundersmart

contracts.Whentheydothejobasspecified,theyareinstantlypaid—perhaps

notbiweeklybutdaily,hourly,orinmicroseconds.Astheentitywouldn’t

necessarilyhaveananthropomorphicbody,employeesmightnotevenknowthat

algorithmsaremanagingthem.Buttheywouldknowtherulesandnormsfor

goodbehavior.Giventhatthesmartcontractcouldencodethecollective

knowledgeofmanagementscienceandthattheirassignmentsandperformance

metricswouldbetransparent,peoplecouldlovetowork.

Customerswouldprovidefeedbackthattheenterprisewouldapply

dispassionatelyandinstantlytocorrectcourse.Shareholderswouldreceive

dividends,perhapsfrequently,asreal-timeaccountingwouldobviatetheneed

foryear-endreports.Theorganizationwouldperformalltheseactivitiesunder

theguidanceandincorruptiblebusinessrulesthatareastransparentastheopen

sourcesoftwarethatitsfoundersusedtosetitinmotion.

Welcometotomorrow’sdistributedautonomousenterprise(DAE),powered

byblockchaintechnologyandcryptocurrencies,whereautonomousagentscan

self-aggregateintoradicallynewmodelsoftheenterprise.

Beforeyousaythatthisallsoundsimpractical,pointless,orsomethingfrom

sci-fi,considerthefollowing.Usingtokens,companiessuchasConsenSyshave

alreadyissuedsharesintheirfirms,stagingpublicofferingswithoutregulatory

oversight.Youcouldlegallyrecordtheownershipofprivatelyheldcorporations

andtransferthosesharestootherpersonsontheblockchain.Yourshare

certificatescanpaydividendsandconfervotingpower.Thatsaid,yournew

“blockcom”isdistributed;itdoesn’texistwithoutjurisdiction,butyour

shareholderscanliveanywhere.Imagineasimilarmechanismtoissuedebtin

theformofbonds,eitherprivatecorporatebondsorsovereignbonds,essentially

creatingabondmarket.Thesamelogicappliestocommodities—notthe

commodityitselfbutanotethatcorrespondstothecommodity,similartohow

theChicagoMercantileExchangeortheglobalgoldmarketwork.

Butdon’tthinkofsecuritiesasyoucurrentlyknowthem.Imagineaglobal

IPOwith100millionshareholderseachcontributingafewpennies.It’snot

unthinkablethatmanagementandgovernancecouldoccuronamassivescale,

withmillionsofpeoplehavingvotingshares.Atlast,investorsatthebottomof

thepyramidcouldparticipateandownsharesofawealth-creatingventure

anywhereintheworld.Intheoryatleast,wecoulddesignacorporationwithout

executives,onlyshareholders,money,andsoftware.Codeandalgorithmscould

replacealayerofrepresentatives(i.e.,theexecutiveboard),withshareholders

exertingcontroloverthatcode.Theopportunityforprosperityissignificant,

nothinglessthanthedemocratizationofownershipofwealth-creating

instruments.

Notpractical?Perhaps.Butconsiderthatentrepreneursarealreadyusing

scriptinglanguagessuchasEthereumtodesignsuchfunctionsforeventually

autonomousmodels.Alreadyinnovatorsareimplementingcodethatpermits

multisignaturecontroloverfunds.Throughcrowdfundingcampaigns,massesof

peoplearepurchasingequityincompanies.DAppsarealreadygivingwayto

autonomousagents.

Thiscompletelydistributedenterprisecouldhaveawalletthatrequires

thousandsofsignatoriestoachieveconsensusinordertospendmoneyonan

importanttransaction.Anyshareholdercouldsuggestarecipientforthatmoney,

marshalingconsensusaroundthattransaction.Astructurelikethiswouldhave

obviouschallenges.Forexample,mechanismswouldneedtobeinplaceto

quicklyachieveconsensus.Orwhoisresponsiblefortheoutcomeofthat

transaction?Ifyou’vecontributedoneten-thousandthofavote,whatisyour

legalresponsibilityandliability?Couldtherebeself-propagatingcriminalor

terroristorganizations?AndreasAntonopoulosisnotconcerned.Hebelievesthat

thenetworkwillmanagesuchdangers.“Makethistechnologyavailabletoseven

andahalfbillionpeople,7.499billionofthosewilluseitforgoodandthatgood

candeliverenormousbenefittosociety.”

THEBIGSEVEN:OPENNETWORKEDENTERPRISEBUSINESS

MODELS

Therearecountlessopportunitiestoconstructopennetworkedenterprisesthat

disruptordisplacetraditionalcentralizedmodels,potentiallyevolvinginto

nascentdistributedautonomousenterprises.Considerhowthedistributedmodel

willdisruptorreplacetheeightfunctionsoffinancialservices—everythingfrom

retailbankingandstockmarketstoinsurancecompaniesandaccountancies.

Incumbentandnewentriesalikecanconstructnewbusinessarchitecturesthat

caninnovatebetter,createbettervalueatlowercost,andshiftandenable

producerstoshareinthewealththeycreate.

Blockchaintechnologytakessomeofthenewbusinessmodelsdescribedin

Wikinomicstoanewlevel.

Let’slookathowwecanexpandpeerproduction,

ideagoras,prosumers,openplatforms,thenewpowerofthecommons,the

globalplantfloor,andthewiki(social)workplacebyaddinginnativepayment

systems,reputationsystems,uncensorablecontent,trustlesstransactions,smart

contracts,andautonomousagents—thekeyinnovationsoftheblockchain

revolution.

1.ThePeerProducers

Peerproducersarethethousandsofdispersedvolunteerswhobroughtyouopen

sourcesoftwareandWikipedia,innovativeprojectsthatoutperformthoseofthe

largestandbest-financedenterprises.Communitymembersparticipateforthe

funofit,asahobby,tonetwork,orbecauseoftheirvalues.Now,byenabling

reputationsystemsandotherincentives,blockchaintechnologycanimprove

theirefficiencyandrewardthemforthevaluetheycreate.

Peerproductioncommunitiescanbe“commons-basedpeerproduction,”a

phrasecoinedbyHarvardLawprofessorYochaiBenkler.

Sometimescalled

socialproduction,alsoBenkler’sterm,thissystemmeansthatgoodsand

servicesareproducedoutsidetheboundsoftheprivatesectorandarenot

“owned”byacorporationorindividual.Amongthecountlessexamplesarethe

Linuxoperatingsystem(ownedbynoonebutnowthemostimportantoperating

systemintheworld),Wikipedia(ownedbytheWikimediaFoundation),andthe

FirefoxWebbrowser(ownedbytheMozillaFoundation).Peerproductioncan

alsorefertoactivitiesintheprivatesectorwherepeerscollaboratesociallyto

producesomethingbutthegoodisnotsociallyowned.

Peerproductionasabusinessmodelmattersfortworeasons.First,

sometimespeerscollaboratevoluntarilytoproducegoodsandserviceswherea

corporationactsascuratorandachievescommercialbenefit.Readerscreatethe

contentontheRedditdiscussionplatform,buttheydon’townit.Redditisthe

tenth-biggestsiteintheUnitedStatesintermsoftraffic.Second,companiescan

tapintovastpoolsofexternallabor.IBMembracedLinuxanddonatedhundreds

ofmillionsofdollars’worthofsoftwaretotheLinuxcommunity.Indoingso,

IBMsaved$900millionayeardevelopingitsownproprietarysystemsand

createdaplatformonwhichitbuiltamultibillion-dollarsoftwareandservices

business.

Experienceshowsthatlong-termsustainabilityofvolunteercommunities

canbechallenging.Infact,someofthemoresuccessfulcommunitieshave

foundwaystocompensatemembersfortheirhardwork.AsSteveWozniaksaid

toStewartBrand,“Informationshouldbefree,butyourtimeshouldnot.”

InthecaseofLinux,mostoftheparticipantsgetpaidbycompanieslike

IBMorGoogletoensurethatLinuxmeetstheirstrategicneeds.Linuxisstillan

exampleofsocialproduction.Benklertoldus,“Thefactthatsomedevelopers

arepaidbythirdpartiestoparticipatedoesnotchangethegovernancemodelof

Linux,orthefactthatitissociallydeveloped.”Thisismorethanso-calledopen

innovationthatinvolvescooperationbetweenfirmsandsharingcertain

intellectualproperty,hesaid.“Thereisstillsubstantialsocialmotivationfor

manycontributorsandassuchit’sahybridmodel.”

Further,manyofthesecommunitiesareplaguedwithbadbehavior,

incompetence,saboteurs,andtrolls—peoplewhosowdiscordbyposting

inflammatory,incorrect,oroff-topicmessagestodisruptthecommunity.

Reputationinthesecommunitiesistypicallyveryinformal,andthereisno

economicincentiveforgoodbehavior.

Withblockchaintechnologypeerscandevelopmoreformalreputationsfor

effectivecontributionstothecommunity.Todiscouragebadbehavior,members

couldanteupasmallamountofmoneythateitherincreasesordecreasesbased

oncontribution.Incorporate-ownedcommunities,peerscouldshareinthevalue

theycreateandreceivepaymentfortheircontributionsassmartcontractsdrop

transactioncostsandopenupthewallsofthefirm.

ConsiderReddit.Thecommunityhasrevoltedovercentralizedcontrolbut

stillsuffersfromflippant,abrasivemembers.Redditcouldbenefitfrommoving

toamoredistributedmodelthatrewardsgreatcontributors.ConsenSysis

alreadyworkingonablockchainalternativetoRedditthatdoesjustthat.By

offeringfinancialincentives,theConsenSysteamthinksitcanimprovethe

qualityofRedditlikeconversations,withoutcentralizedcontrolandcensorship.

TheEthereumplatformprovidesincentives,perhapsinrealtime,toproduce

high-qualitycontentandbehavecivillywhilecontributingtocollective

understanding.

Reddithasasysteminplace,calledReddit“Gold”—atokenthatuserscan

buyandthenusetorewardpeoplewhosecontributionstheyvalue.Themoney

fromtokensgoestositemaintenance.Thegoldhasnointrinsicvaluetousers.

Sowithareal,transferable,blockchain-basedcoinincentive,Redditmembers

couldactuallybegintogetpaidformakingthesitemorerobust.

Wikipedia,theflagshipofsocialproduction,couldbenefitaswell.Right

nowallpersonswhoeditarticlesdevelopaninformalreputationbasedonhow

manypiecestheyhaveeditedandhoweffectivetheyare,asmeasuredbyhighly

subjectiveterms.TheWikipediacommunitydebatesconstantlyoverincentive

systems,butadministeringsomekindoffinancialcompensationtoseventy

thousandvolunteershasn’tbeenfeasible.

WhatifWikipediawentontheblockchain—callitBlockapedia.Inaddition

tothebenefitsofentriestime-stampedintoanimmutableledger,therecouldbe

moreformalmeasuresofone’sreputationthatcouldhelpincentgoodbehavior

andaccuratecontributions.Sponsorscouldfund,oralleditorscouldcontribute

moneyto,anescrowaccount.Eacheditorcouldhaveareputationlinkedtothe

valueofheraccount.Ifshetriedtocorruptanarticle,statingforexamplethat

theHolocaustneverhappened,thevalueofherdepositwoulddecline,andin

casesofdefamationorinvasionofprivacy,shewouldloseitandevenfacecivil

orcriminalaction.ThetrueeventsoftheSecondWorldWarcouldbeestablished

inmanyways,forexample,byaccessingunchangeablefactsontheblockchain

orthroughalgorithmsthatshowconsensusregardingthetruth.

ThesizeofyourBlockapediasecuritydepositcouldbeproportionaltoyour

previousreputationonWikipediaorsimilarplatforms.Ifyou’reabrand-new

userandhavenoreputation,you’llputupalargersecuritydeposittoparticipate.

Ifyou’veedited,say,twohundredarticlesonWikipediasuccessfully,your

depositmightbesmall.

ThisisnotnecessarilyaboutmovingWikipediatoafor-hirecompensation

model.“It’ssimplyacaseofprovidingreal-worldeconomicgainorloss

dependingontheaccuracyandveracityoftheinformationyou’reproviding,”

saidDinoMarkAngaritis,CEOoftheblockchain-basedSmartwallet.Defacing

Blockapediahurtsyourformalreputationbutyoualsolosemoney.

ButWikipediaworksprettywellrightnow,right?Notquite.AndrewLih,

writinginTheNewYorkTimes,pointedoutthat,in2005,thereweremonths

whenmorethansixtyeditorsweremadeadministrator,apositionwithspecial

privilegesineditingtheEnglish-languageedition.In2015,thesitehasstruggled

topromoteevenoneeditorpermonth.Beingavoluntaryglobalorganization,

thereareinternaltensions.Worse,editingcontentonamobiledeviceisdifficult.

“ThepoolofpotentialWikipediaeditorscoulddryupasthenumberofmobile

userskeepsgrowing.”LihconcludesthatthedemiseofWikipediawouldbe

unfortunate.“Noeffortinhistoryhasgottensomuchinformationatsolittlecost

intothehandsofsomany—afeatmadeallthemoreremarkablebytheabsence

ofprofitandowners.InanageofInternetgiants,thismostselflessofwebsitesis

worthsaving.”

Overall,peerproductioncommunitiesareattheheartofnew,networked

modelsofvaluecreation.Inmostindustries,innovationincreasinglydependson

densenetworksofpublicandprivateparticipantsandlargepoolsoftalentand

intellectualpropertythatroutinelycombinetocreateendproducts.AsIBM

embracedLinux,firmscaneventieintoself-organizingnetworksofvalue

creatorsliketheopensourcemovementtococreateorpeer-producevalue.

2.TheRightsCreators

DuringthefirstgenerationoftheInternet,manycreatorsofintellectualproperty

didnotreceivepropercompensationforit.Musicians,playwrights,journalists,

photographers,artists,fashiondesigners,scientists,architects,andengineersall

werebeholdentorecordlabels,publishers,galleries,filmstudios,universities,

andlargecorporationsthatinsistedtheseinventorsassigntheirintellectual

propertyrightstowhatessentiallyarelargerightsmanagementoperationsin

exchangeforlessandlessoftheirIP’svalue.

Blockchaintechnologyprovidesanewplatformforcreatorsofintellectual

propertytogetvalueforit.Considerthedigitalregistryofartwork,includingthe

certificatesofauthenticity,condition,andownership.Anewstart-up,Ascribe,

enablesartiststhemselvestouploaddigitalart,watermarkitasthedefinitive

version,andtransferitsothat,likebitcoin,itmovesfromoneperson’scollection

toanother’s.That’shuge.Thetechnologysolvestheintellectualpropertyworld’s

equivalentofthedouble-spendproblembetterthanexistingdigitalrights

managementsystems,andartistscoulddecidewhether,when,andwherethey

wantedtodeployit.

MemeartistRonenVsaid,“Artisacurrency.Theevolutionofartinto

digitalcurrencyis—noquestion—thefuture.Andthisisagoodstep.”

Musicians,photographers,designers,illustrators,orotherartistswhosework

couldbedigitizedandwatermarkedasadefinitivecopycouldusethis

technologytotransformtheirintellectualpropertyintoatradableasset,alimited

editionperhapscustomizedforaparticularfan.Artistsandmuseumscanuse

Ascribe’stechnologytoloanpiecestootherindividualsorinstitutions.

Monegraphoffersasimilarservice:itusesdigitalwatermarksandthe

cryptographyintrinsictotheblockchainforauthenticatingpieces.Artistssimply

uploadthearttoapageontheInternetandsubmittheURLtoMonegraph.The

firmissuesasetofpublicandprivatekeys,exceptthatthevalueassociatedwith

thepublickeyisadigitaldeedtotheartratherthanbitcoinperse.Monegraph

alsotweetsapublicannouncementofthedeed,noteworthybecausetheU.S.

LibraryofCongressarchivespublicTwitterfeeds.

Someoneelsemighttryto

claimtheURLashisown,buttherewouldalreadybeatleasttwoproofsinthe

publicrecordtoverifyownership.

Verisart,aLosAngeles–basedstart-upwithbitcoincoredeveloperPeter

Toddasanadviser,hasevengreaterambitions.Certifyingtheauthenticityand

theconditionofapieceoffineartisbigbusiness,andonethatislargelypaper

basedandcontrolledbyeliteexpertswithaccesstorestricteddatabases.Finding

whoownstheart,whereit’sstored,andinwhatconditionisarealchallenge,

evenforthosewhoactuallyknowwhatthey’relookingfor.Verisartis

combiningblockchaintechnologyandstandardmuseummetadatatocreatea

publicdatabaseofartandcollectibles.Thisworldwideledgerwillserveartists,

collectors,curators,historians,artappraisers,andinsurersanywhereinthe

world.

Byusingthebitcoinblockchain,Verisartcanconferdigitalprovenance

toanyphysicalwork,notjustdigitalart,anduserswillbeabletocheckawork’s

authenticity,condition,andchainoftitlefromtheirmobiledevicebeforethey

participateinanonlineauctionoragreetoasale.“Webelievetechnologycan

aidtrustandliquidity,especiallyasmoreofthe$67billionannualartmarket

shiftstoprivatesales(peer-to-peer)andonlinetransactions,”founderRobert

NortontoldTechCrunch.“Theartworldisnotbroken.Itjustreliestoomuchon

middlementoensuretrustandliquidity.Webelievetheadventofadecentralized

world-wideledgercoupledwithpowerfulencryptiontomasktheidentitiesof

buyerandsellerwillbeattractivetotheartworld.”

Theartistbecomeswhat

couldbecalleda“rightsmonetizer”withthetechnologymakingdealsand

collectingrevenueinrealtime.

Youcouldapplythissamemodeltootherfieldsaswell.Inscience,a

researchercouldpublishapapertoalimitedaudienceofpeers,asSatoshi

Nakamotodid,andreceivereviewsandthecredibilitytopublishtoalarger

audience,ratherthanassigningallrightstoascientificjournal.Thepapermight

evenbeavailableforfreebutotherscientistscouldsubscribetoadeeper

analysisorthreadeddiscussionswiththeauthoraboutit.Shecouldmakeher

rawdataavailableorperhapssharedatawithotherscientistsaspartofasmart

contract.Ifthereisacommercialopportunityflowingfromthepaper,therights

couldallbeprotectedinadvance.Moreonthisinchapter9.

3.BlockchainCooperatives

Thetrustprotocolsuperchargescooperatives—autonomousassociationsformed

andcontrolledbypeoplewhocometogethertomeetcommonneeds.

“It’snonsensetocallUberasharingeconomycompany,”saidHarvard

professorBenkler.“Uberhasusedtheavailabilityofmobiletechnologytocreate

abusinessthatlowersthecostoftransportationforconsumers.That’sallithas

done.”

DavidTicollsaid,“IncommonEnglishusage,sharingdenotesfree

exchange—notfinancialtransactions.Asinkids’sharingtoys.It’sashamethat

thistermhassomewhatlostthatmeaning.”Tohim,“sharingisthemainway

thathumansandmembersofotherspecieshaveconductedexchangeswithone

anotherformillionsofyears,beginningwiththeactofconceptionitself.While

someInternetcompanieshavefacilitatedgenuinesharing,othershave

appropriatedandcommoditizedthesocialrelationshipsandvocabularyof

sharing.”

Mostso-calledsharingeconomycompaniesarereallyserviceaggregators.

Theyaggregatethewillingnessofsupplierstoselltheirexcesscapacity(cars,

equipment,vacantrooms,handymanskills)throughacentralizedplatformand

thenresellthem,allwhilecollectingvaluabledataforfurthercommercial

exploitation.

CompanieslikeUberhavecrackedthecodeforlarge-scaleservice

aggregationanddistribution.Airbnbcompeteswithhotelsontravel

accommodations;LyftandUberchallengetaxiandlimousinecompanies;Zipcar,

beforeitwaspurchasedbyAvis,challengedtraditionalcarrentalcompanies

withitshipconvenienceandconvenienthourlyrentals.

Manyofthesecompanieshaveglobalizedthemerchandisingoftraditional

local,small-scaleservices—likebed-and-breakfasts,taxis,andhandypersons.

Theyusedigitaltechnologiestotapintoso-calledunderutilized,time-based

resourceslikerealestate(apartmentbedrooms),vehicles(between-calltaxis),

andpeople(retireesandcapablepeoplewhocan’tgetfull-timejobs).

Blockchaintechnologyprovidessuppliersoftheseservicesameansto

collaboratethatdeliversagreatershareofthevaluetothem.ForBenkler,

“Blockchainenablespeopletotranslatetheirwillingnesstoworktogetherintoa

setofreliableaccounting—ofrights,assets,deeds,contributions,uses—that

displacessomeofwhatacompanylikeUberdoes.Sothatifdriverswanttoset

uptheirownUberandreplaceUberwithapurecooperative,blockchainenables

that.”Heemphasizedthewordenable.Tohim,“There’sadifferencebetween

enablingandmovingtheworldinanewdirection.”Hesaid,“Peoplestillhaveto

wanttodoit,totaketheriskofdoingit.”

SogetreadyforblockchainAirbnb,blockchainUber,blockchainLyft,

blockchainTaskRabbit,andblockchaineverythingwhereverthereisan

opportunityforrealsharingandforvaluecreationtoworktogetherina

cooperativewayandreceivemostofthevaluetheycreate.

4.TheMeteringEconomy

Perhapsblockchaintechnologycantakeusbeyondthesharingeconomyintoa

meteringeconomywherewecanrentoutandmetertheuseofourexcess

capacity.Oneproblemwiththeactualsharingeconomy,where,forexample,

homeownersagreetosharepowertoolsorsmallfarmingequipment,fishing

gear,awoodworkingshop,garageorparking,andmore,wasthatitwasjusttoo

muchofahassle.“Thereare80millionpowerdrillsinAmericathatareusedan

averageof13minutes,”AirbnbCEOBrianCheskywroteinTheNewYork

Times.“Doeseveryonereallyneedtheirowndrill?”

Thetroubleis,mostpeoplefounditeasierandmorecost-effectivetomake

onetriptoHomeDepotandbuyadrillfor$14.95thanrentitfor$10from

someoneamileaway,makingtwotrips.WroteSarahKesslerinFastCompany

magazine:“TheSharingEconomyisdeadandwekilledit.”

Butwithblockchainswecanrentourexcesscapacityforcertain

commoditiesthatareprettymuchzerohassle—Wi-Fihotspots,computing

powerorstoragecapacity,theheatgeneratedbyourcomputers,ourextramobile

minutes,evenourexpertise—withoutliftingafinger,letaloneschleppingtoand

fromsomestranger’shouseacrossthecity.Whenyoutravel,yourWi-Ficanrent

outitselfinyourabsence,chargingfractionsofpenniesforeverysecondof

usage.Yourimagination(andpossiblynewregulation)isyouronlylimit.Your

subscriptions,physicalspace,andenergysourcescannowbecomesourcesof

income,meteringtheirusedirectlytoacounterpartyandchargingthemforit

throughmicropayments.Allyouneedisadecentralizedvaluetransferprotocol

toallowthemtosafelyandsecurelytransactwithoneanother.Theseplatforms

instillsubsidiaryrightsinallourassets.Youneedtodecidetheextenttowhich

youwanttoassignothersusageandaccessrights—eventherighttoexclude

othersfromusingyourassets—andwhattochargeforthoserights.

Thiscanworkforphysicalassetstoo.Forexample,we’veheardalotabout

autonomousvehicles.Wecanbuildanopentransportationnetworkonthe

blockchainwhereownerseachhaveaprivateencryptedkey(number)thatlets

themreserveacar.Usingthepublickeyinfrastructureandexistingblockchain

technologieslikeEtherLockandAirlock,theycanunlockandusethecarfora

certainamountoftime,asspecifiedbytherulesofthesmartcontract—allthe

whilepayingthevehicle(oritsowners)inrealtimeforthetimeandenergythat

theyuse—asmeteredonablockchain.Becauseblockchaintechnologyis

transparent,thegroupofownerscantrackwhoisabidingbytheircommitments.

Thosewhoaren’ttakeareputationalhitandeventuallyloseaccessaltogether.

5.ThePlatformBuilders

Enterprisescreateplatformswhentheyopenuptheirproductsandtechnology

infrastructurestooutsideindividualsorcommunitiesthatcancocreatevalueor

newbusinesses.Onetypeisprosumers,customerswhoproduce.

Inadynamic

worldofcustomerinnovation,anewgenerationofproducer-consumers

considersthe“righttohack”itsbirthright.Blockchaintechnologysupercharges

prosumption.Nikerunningshoescouldgenerateandstoredataonadistributed

ledgerthat,inturn,Nikeandtheshoewearercouldmonetizeasagreedintheir

smartcontract.Nikecouldofferatinypieceofitsshareswitheverypairitsells,

ifthecustomeragreestoactivatethesmartsintheshoes,orevensynchershoes

tootherwearables,suchasaheartmonitororglucoselevelcalculatororother

valuabledataforNike.

Someplatformsdifferfromprosumercommunitieswhereacompany

decidestococreateproductswithitscustomers.Withopenplatforms,acompany

offerspartnersabroadervenueforstagingnewbusinessesorsimplyadding

valuetotheplatform.

Nowwithblockchaintechnologycompaniescanquicklycreateplatforms

andpartnerwithotherstocreateplatformsorutilitiesforanentireindustry.

RobinChasefoundedZipcar(aserviceaggregator)aswellasBuzzcar(userscan

sharetheircarswithothers),andisnowtheauthorofPeersInc.,alucidbookon

thepowerofpeersworkingtogether.Shetoldus,“Leveragingthevaluefoundin

excesscapacitydependsonhigh-qualityplatformsforparticipation.These

platformsdon’tcomecheap.Theblockchainexcelsinprovidingastandard

commondatabase(openAPIs)andstandardcommoncontracts.Theblockchain

canmakeplatformbuildingcheaperandmanageable.”That’sjustthebeginning.

“Bestofall,itscommondatabasemakesfordatatransparencyandportability:

consumersandsupplierscanpursuethebestterms.Theycanalsocooperateas

peersontheblockchaintocreatetheirownplatforms,ratherthanusingthe

capabilitiesoftraditionalcompanies.”

Thinkofthecarofthefutureitself.Itwouldexistaspartofablockchain-

basednetworkwhereeveryonecanshareinformation,andvariouspartsofthe

vehiclecandotransactionsandexchangemoney.Givensuchanopenplatform,

thousandsofprogrammersandnichebusinessescouldcustomizeapplications

foryourcar.Soonsuchplatformscouldtransformentireindustriessuchas

financialservicesbysettlingallkindsoffinancialtransactionsandexchangesof

value.Aconsortiumofthelargestbanksisalreadyworkingontheidea.

Platformsaretherisingtidethatliftsallboats.

Wikinomicsintroducedtheconceptofideagoras—emergingmarketplacesfor

ideas,inventions,anduniquelyqualifiedminds,whichenabledcompanieslike

P&Gtotapglobalpoolsofhighlyskilledtalentmorethantentimesthesizeof

itsownworkforce.FirmsuseserviceslikeInnoCentiveandInno360tofacilitate

holding“Challenges,”“DigitalBrainstorms,”andothertechniquestofindthe

righttemporarytalentoutsidetheirboundariestoaddresscriticalbusiness

challenges.It’saboutusingdatatofindtherighttalenttohackyourbusinessfor

thebetter.

Talent—theuniquelyqualifiedmindstosolveproblems—canposttheir

availabilitytotheledgersothatfirmscanfindthem.RatherthanInnoCentive,

thinkbInnoCentive.Individualscancultivatenotonlyaportableidentity,but

alsoaportablerésumé(anextendedversionoftheiridentity)thatcanprovide

appropriateinformationaboutthemtopotentialcontractors.Thinkadistributed

skillsinventoryownedbynooneoreveryone.

Aseverybusinessbecomesadigitalbusiness,thehackathonisanimportant

formofideagora.Nowwithblockchaintechnologyandopensourcecode

repositories,everycompanycouldprovidevenuestogeeksandotherbusiness

buildersforproblemsolving,innovating,andcreationofnewbusinessvalue.

Blockchainsandblockchain-basedsoftwarerepositorieswillfuelsuch

activity.Companiescannowusepowerfulnewprogramminglanguageslikethe

Ethereumblockchainwithbuilt-inpaymentsystems.Anexcerptfroma

conversationonHackerNews:“ImaginehowcoolitwouldbeifIcouldsharea

guidformyrepo—andthenyourbitclient(let’scallitgitcoin,ormaybejustbit)

canfetchnewcommitsfromadistributedblockchain(essentiallythegitlog).

Githubisnolongeranintermediaryorasinglepointoffailure.Privaterepo?

Don’tsharetheguid.”

Howcoolindeed!(Well,maybeyoudidn’tunderstandoneiotaofthatlittle

pieceofcoolness,butyouprobablygettheidea.)

6.BlockchainMakers

Manufacturing-intensiveindustriescangiverisetoplanetaryecosystemsfor

sourcing,designing,andbuildingphysicalgoods,markinganewphaseofpeer

production.It’saboutmakingitontheblockchain.Justasamodernaircrafthas

beendescribedas“abunchofpartsflyinginformation,”companiesinmost

industriesaretendingtodisaggregateintonetworksofsuppliersandpartners.

Three-dimensionalprintingwillmovemanufacturingclosertotheuser,bringing

newlifetomasscustomization.Soon,dataandrightsholderscanstoremetadata

aboutanysubstancefromhumancellstopoweredaluminumontheblockchain,

inturnopeningupthelimitsofcorporatemanufacturing.

Thistechnologyisalsoapowerfulmonitoroftheprovenanceofgoodsand

theirmovementthroughoutasupplynetwork.Consideranindustryclosetoall

ourhearts(andotherbodyparts)—thefoodindustry.Todayyourlocalgrocery

storemayclaim—andtrulybelieve—thatitsbeefissafe,raisedhumanely,fed

qualityingredients,andgivennounnecessarydrugs.Butitcan’tguaranteeit.No

onekeepshistoriesofsinglecows;badthingshappentogoodbovines.Wetrust

ourhamburgerwithnomeanstoverify.Usuallyitmakesnodifference;billions

andbillionskeepgettingserved.Butonceinawhile,wegetaglimpseofmad

cowdisease.

Thefoodindustrycouldstoreontheblockchainnotjustthenumberofevery

steer,butofeverycutofmeat,potentiallylinkedtoitsDNA.Three-dimensional

searchabilitiescouldenablecomprehensivetrackingoflivestockandpoultryso

thatuserscouldlinkananimal’sidentitytoitshistory.Usingsophisticated(but

relativelysimpletouse)DNA-basedtechnologiesandsmartdatabase

management,eventhelargestmeatproducerscouldguaranteequalityandsafety.

Imaginehowthesedatamightexpeditelabtestsandacommunityhealth

responsetoacrisis.

Knowinghowourfoodwasraisedorgrownisnotaradicalidea.Our

ancestorsboughtsuppliesatlocalmarketsorfromretailerswhosourced

productslocally.Iftheydidn’tlikehowalocalranchertreatedhiscattle,they

didn’tbuyhisbeef.Buttransportationandrefrigerationhaveestrangedusfrom

ourfoodstuffs.We’velostthevaluesoftheoldfoodchain.

Wecouldrestorethesevalues.Wecouldleadtheworldindevelopinga

modern,industrialized,openfoodsystemwithdown-to-earthfamilyfarm

values.Transparencyletscompanieswithsuperiorpracticesdifferentiate

themselves.Thebrandcouldevolvefromthemarketingnotionofatrustmark—

somethingthatcustomersbelieveinbecauseit’sfamiliar—intoarelationship

basedontransparency.Surelyfoodproducershaveanappetiteforthat.

7.TheEnterpriseCollaborators

YochaiBenklerspokeabouthowblockchaintechnologycouldfacilitatepeer-to-

peercollaborationwithinfirms,andbetweenfirmsandpeersofallsorts.“I’m

excitedabouttheideathatyouhaveafullydistributedmechanismfor

accounting,foractions,andfordigitalresourcesacrossanything;whetherit’s

currency,whetherit’ssocialrelationsandexchange,orwhetheritsan

organization.”

Today,commercialcollaborationtoolsarebeginningtochangethenatureof

knowledgeworkandmanagementinsideorganizations.

ProductslikeJive,

IBMConnections,SalesforceChatter,CiscoQuad,MicrosoftYammer,Google

AppsforWork,andFacebookatWorkarebeingusedtoimproveperformance

andfosterinnovation.Socialsoftwarewillbecomeavitaltoolfortransforming

virtuallyeverypartofbusinessoperations,fromproductdevelopmenttohuman

resources,marketing,customerservice,andsales—inasensethenewoperating

systemforthetwenty-first-centuryorganization.

Butthereareclearlimitationstotoday’ssuitesoftools,andtheblockchain

takesthesetechnologiestothenextlevel.Existingvendorswilleitherface

disruptionorembraceblockchaintechnologiestodelivermuchdeepercapability

totheircustomers.

Whatwouldablockchainsocialnetworkforthefirmlooklike?Think

Facebookforthecorporation(orsimplyanalternativetoFacebookforyou).

Becauseseveralcompaniesareworkingonthis,wecanflash-forwardayearor

twoandhere’swhatweget:

Everyuserhasamultifacetedwallet,asortofportalintothedecentralized

onlineworld.Thinkaportablepersonalprofile,apersonaoridentitythatyou

own.UnlikeyourFacebookprofile,thewallethasdiversefunctionsandstores

manykindsofpersonalandprofessionaldataandvaluablesincludingmoney.It

isalsoprivatetoyouandyoushareonlywhatyouwant.Youhavepairsof

public-privatekeysthatservetoanchoryourpersistentdigitalID.While

multiplepersonascanbehousedinthewalletforeachpersonorcompany,let’s

assumethatawalletholdsasinglecanonicalpersonaanchoredinasinglekey

pair.Apublishingsystemdeliversastreamofinformationthatyouoryourfirm

willhappilypayfor—acolleague’spatchofnewcode,asummaryofa

conversationwithanewclient,or—withtheclient’spermission—atape

recordingofacall,aTwitterfeedfromaconferencethatyoucouldn’tattend,

livestreamofaclient’suseofyournewproduct,photographsofyour

competitors’boothsatanindustryexpo,aPrezipresentationthatseemstobe

closingnewbusiness,avideohow-toofsomethingacolleaguejustinvented,

assistanceincompletingapatentapplication,oranythingelsethatyouvalue.

Thereisadvertising,perhapsfromthirdpartiesormaybefromtheHR

departmentaboutopenenrollmentorchangesininsuranceplans,butyou,not

Facebook,getrevenueorsomerewardforpayingattention.Thisiscalledan

“attentionmarket.”Youcouldreceivemicrocompensationforagreeingtoview

orinteractwithanadvertisement,orforfeedingbackindetailaboutanew

productpitch,orjustaboutanythingelse,suchastranscribingCAPTCHAs

or

scanneddocuments.

Thenewsstream,publishingsystem,andtheattentionmarketalllook

similar,butpaymentsflowdifferentlyforeach.SaidConsenSys’sJoeLubin,

“Youpayforpublishing.Companiespayforyourattention.Thenewsstreamhas

nopaymentflow.Iamhappytoreadyourstream,becauseIvaluethatsocial

connection,butIamnotgoingtopaytoseeapictureofyouandyourbuddies

drinkingatabar,ortoreadyouropinionontheBlueJayspitchingstaff.”

Youalsoparticipateinorcreatetopicaldiscussionchannels,whereyou

configureyourprivacy.Privacyisenhancedinothermannerstoo.Forexample,

spyagenciescan’tconducttrafficanalysisbecausetheyareunabletodiscernthe

sourceordestinationofmessages.

Therewouldalsobeaniftymechanismforfindingpeopleandfeedsthatyou

mightcareabout.Inaddition,distributedtoolsaggregateandpresentinteresting

newpeopleorinformationforyoutofolloworfriend,possiblyusingFacebook’s

socialgraphtohelpout.Lubincallsthis“bootstrappingthedecentralizedWeb

usingthepillarsofthecentralizedWeb.”

Experienceshowsthatvalueultimatelywinsoutinthedigitalage.The

benefitsofthisdistributedmodelarehuge—atleasttotheusersandcompanies.

Thehugeresourcesofsocialmediacompaniesnotwithstanding,thereisnoend

totherichnessandfunctionalitythatwecandevelopinsuchanopensource

environment.ComparethepowerandsuccessofLinuxversusproprietary

operatingsystems.Blockchaintechnologiesensuresecurity.Yourprivacyis

completelyconfigurable.Nosocialmediacompanycansellorleakyour

personalinformationtogovernmentagencieswithoutyourpermission.Ifyou’re

adissidentinatotalitariancountry,noonecantrackwhatyouhavereadorsaid

online.Becauseyouownyourdata,youcanmonetizeitalongwithyour

attentionandefforts.Youshareinthewealthofbigdata.

Companiestooshouldbeenthusiasticabouttheiremployees’usingsuch

platformsforbusiness.Toattracttalent,firmsneedtoshowintegrityandrespect

theiremployees’securityandprivacy.Moreimportant,asanyfirmworksto

becomenetworked,approachingtalentoutsideitsboundaries,theycanofferup

suchinterenterprisecollaborativeplatformsthattheirpartnerscantrust.Time

willtell.

Insummary,thesearesevenoftheemergingbusinessmodelswherebyboth

companieslargeandsmallcanmakeit“rainontheblockchain.”Overall,the

opennetworkedenterpriseshowsprofound,evenradicalpotentialtosupercharge

innovationandharnessextraordinarycapabilitytocreategoodvaluefor

shareholders,customers,andsocietiesasawhole.

HACKINGYOURFUTURE:BUSINESSMODELINNOVATION

Asforacompanymanagedbysoftwareagents,RonaldCoasemustbehigh-

fivinguptheresomewhereinEconomists’Heaven(althoughsomemightdispute

thatsuchaplaceexists).RememberthereverseofCoase’slaw?Acorporation

shouldshrinkuntilthecostsoftransactionsinsidearelessthanthecostsof

transactionsoutsideitsboundaries.Astechnologycontinuestodropcostsinthe

market,it’sconceivablethatcorporationscouldandshouldhaveverylittleinside

—exceptsoftwareandcapital.

Thinkaboutit.

Tobegin,thecostof“search”continuestodropasnewagentshavethe

abilitytoconductthree-dimensionalsearchesoftheWorldWideLedgerof

everythingcommercialthatexistsorhasexisted.Sononeedforacorporate

library,informationspecialists,HRsearchspecialists,orthemyriadother

professionalsinvolvedinacquiringpertinentinformationtorunabusiness.

Second,smartcontractswouldradicallyreducethecostsofcontracting,

policingcontracts,andmakingpayments.Nolongerpaper,theseprogramscould

formulatetheirtermsthroughaseriesoftemplates;bargain,acceptingor

rejectingtermsandconditionsbasedonrulesandextensiveinformation

collectedfromexternalsources;formulateself-enforcingpolicies;determine

whenperformanceconditionshavebeenmet;andexecutetransactions.

Third,thecostofcoordinationofalltheseresourcesoutsidetheorganization

couldbetrivial—measuredintheenergytopowertheservershostingthe

enterprisesoftware.Asformanaginghumans,organizations,andfactorieshired

bytheenterprise,theenterprisehasnoneedforbureaucracy.Withthenew

platformwecanimagineaneworganizationthatrequireslittleornotraditional

managementorhierarchytogeneratecustomervalueandownerwealth.

Finally,thecostsofestablishingtrustwouldapproximatezero.Trustdoes

notrestwiththeorganization,butratherwithinthefunctionality,security,and

auditabilityoftheunderlyingcodeandthemasscollaborationofthecountless

peoplesecuringtheblockchain.

Howwouldyougoaboutdesigningadistributedautonomousenterprise?

Suchanentitycouldhaverichfunctionality—agentsexecutingrangesoftasksor

morebroadlybusinessfunctionsallbasedonapreapprovedcharter.Individuals,

organizations,orcollectivesofpotentialshareholdersoruserswilldesignthem

bydefiningthefollowing:

1.Conviction:abeliefabouttheworldandwhatneedstobedoneto

createvalueorchangethings.

2.Purpose:itsreasonforexistence.Whyarewecreatingthisenterprise

inthefirstplace?

3.Constitution:outlinestheoverallobjectivesoftheenterpriseandthe

rulesbywhichitwillcreatevalue.

4.Modusoperandi:forexample,howitwillgoaboutcreatingthisvalue.

Howitwillfunditself—throughcrowdfunding,traditionalearly-stage

investment,orusingrevenue.Howitwillacquireresources.

5.Divisionoflaborbetweenhumansandtechnology:fortheforeseeable

future,perhapshumansshouldbeincharge.

6.Applicationfunctions:howtheenterprisewillsenseandrespondto

changingconditions.

7.Moralguidelines:Google’spromiseto“DoNoEvil”isnotgoingto

begoodenough.TheDAEneedssomeclearguidelinesaboutwhatis

andisn’tacceptablebehavior.

Theremaynotbeadistributedautonomousenterpriseinyournearfuture,

butthethinkingbehindthesenewentitiescaninformyourbusinessstrategizing

today.Withtheriseofaglobalpeer-to-peerplatformforidentity,trust,

reputation,andtransactions,wecanfinallyre-architectthedeepstructuresofthe

firmforinnovation,sharedvaluecreation,andperhapsevenprosperityforthe

many,ratherthanjustwealthforthefew.Nowyouhaveatleastsevenemerging

businessmodelsthatcouldhelpyoushakesomewindowsandrattlesomedoors

inyourindustrywhiledistributingwealthmoredemocratically.

Overall,smartcompanieswillworkhardtoparticipatefullyinthe

blockchaineconomyratherthanplayitsvictims.Inthedevelopingworld,the

distributionofvaluecreation(throughentrepreneurship)andvalueparticipation

(throughdistributedownershipofthefirm)mayholdakeytoreconcilingthe

prosperityparadox.Ourstorybecomesevenmoreinterestingwhenyouconsider

thatbillionsofagentswillbeembeddedinthephysicalworld.Whichtakesusto

thenextchapter.

CHAPTER6



THELEDGEROFTHINGS:

ANIMATINGTHEPHYSICALWORLD

powerpolecollapsesateighto’clockonahotnightintheremoteoutbackof

Australia.ThisisaproblemforWilliamandOliviaMunroe,whoraisesheepand

cattleonehundredmilesoutsidetheoldgoldminingtownofLaverton,onthe

edgeoftheGreatVictoriaDesert.

Inthesummer,thetemperaturefrequently

soarscloseto120degreesFahrenheit(48.9°C).Theirchildren,PeterandLois,

attendschoolviasatellitelink,thefamily’sonlymeansofaccessinghealth

servicesincaseofillnessoremergency.AlthoughtheMunroeshaveabackup

generator,itcan’tpowerthewaterpumps,communications,andair-conditioning

forlong.Inshort,thelivesoftheMunroefamilydependentirelyuponreliable

energy.

Atdaybreak,ninehourslater,thepowerutilitysendsoutateamtofindand

fixthedownedpole.Customercomplaintsgivethecompanyanideaofwhere

thebreakoccurred,buttheteamtakesmorethanadaytoidentify,reach,andfix

thepole.Meanwhile,theMunroesandnearbyresidents,businesses,and

institutionsgowithoutpowerandconnectivityatconsiderableinconvenience,

economicimpact,andphysicalrisk.Intheoutback,blackoutsarenotjust

paralyzing;they’redangerous.Tominimizethesehazards,atgreatexpensethe

companydeploysteamsofinspectorstochecktheextensivenetworkregularly

fordownedordeterioratingpoles.

Imaginehowmuchsafer,easier,andcheaperitwouldbeifeachpowerpole

wereasmartthing.Itcouldreportitsownstatusandtriggeractionsfor

replacementorrepair.Ifapolecaughtfireorbegantotiporfallforanyreason,

itwouldgenerateanincidentreportinrealtimeandnotifyarepaircrewtocome

withtheappropriateequipmenttothepreciselocation.Meanwhile,thepole

couldpotentiallyreassignitsresponsibilitiestothenearestworkingpole.After

all,they’reallonthegrid.Theutilitycouldrestorepowertothecommunity

morequicklywithoutthehugeongoingcostsoffieldinspection.

POWERTOTHEPEOPLE

That’sjustthebeginning.Usingemergingsoftwareandtechnologiesassociated

withtheInternetofThings,wecaninstillintelligenceintoexistinginfrastructure

suchasapowergridbyaddingsmartdevicesthatcancommunicatewithone

another.Imaginecreatinganewflexibleandsecurenetworkquicklyand

relativelyinexpensivelythatenablesmoreopportunitiesfornewservices,more

participants,andgreatereconomicvalue.

Thisconfigurationisknownasameshnetwork,thatis,anetworkthat

connectscomputersandotherdevicesdirectlytooneanother.Theycan

automaticallyreconfigurethemselvesdependinguponavailabilityofbandwidth,

storage,orothercapacityandthereforeresistbreakageorotherinterruption.

Communitiescanusemeshnetworksforbasicconnectivitywheretheylack

accessoraffordableservice.Meshnetworksarealternativestotraditionaltop-

downmodelsoforganization,regulation,andcontrol;theycanprovidegreater

privacyandsecuritybecausetrafficdoesn’troutethroughacentral

organization.

Organizationsarealreadycombiningmeshnetworkswithblockchain

technologytosolvecomplexinfrastructureproblems.Filament,anAmerican

company,isexperimentingwithwhatitcalls“taps”onpowerpolesinthe

Australianoutback.Thesedevicescantalkdirectlytoeachotheratdistancesof

upto10miles.Becausethepowerpolesareapproximately200feetapart,a

motiondetectoronapolethat’sfallingwillnotifythenextpole200feetaway

thatit’sintrouble.Ifforanyreasonthetaponthatpoleisn’tavailable,itwill

communicatewiththenextpole,orthenextpole(upto10miles)thatwill

communicatetothecompanythroughtheclosestInternetbackhaullocation

(within120miles).

Withthetap’stwenty-yearbatteryandBluetoothlowenergy(BLE)

technology,customerscanconnecttothedevicesdirectlywiththeirownphone,

tablet,orcomputer.Thetapcancontainnumeroussensorstodetecttemperature,

humidity,light,andsound,allofwhichcustomerscouldusetomonitorand

analyzeconditionsovertime,maybetodeveloppredictivealgorithmsonthelife

cycleorimpendingfailureofapowerpole.Customerscouldbecome

weatherNodesormeterthesedataasaninformationserviceorlicensethedata

setthroughtheblockchaintoanotheruser,suchasagovernment,broadcaster,

polemanufacturer,orenvironmentalagency.

Filament’sbusinessmodelisaservicemodelinvolvingthreeparties:

Filament,itsintegrationcustomer,andtheutilitycompany.Filamentownsthe

hardware;itsdevicescontinuallymonitortheconditionofthepowerpolesand

reportchanges,whetherthey’refallen,onfire,orcompromisedbydust

accumulationorbrushfiresmoke.Filamentsellsthesensordatastreamtothe

integrator,andthisintegratorsellstotheutility.

Theutilitypaysmonthlyforamonitoringservice.Theserviceenablesthe

powercompanytoeliminatetheveryexpensivefieldinspectionofits

operations.Becausepowerpolesrarelyfall,thepowercompanyrarelyusesthe

actualcommunicationcapabilityofthemeshnetwork,andsoFilamentcould

deploytheexcesscapacityofthetapsforotheruses.

“SinceFilamentownsthedevices,wecansellextranetworkcapacityontop

ofthisnetworkthatspansmostofthecontinent,”saidEricJennings,Filament’s

cofounderandCEO.“FilamentcouldstrikeadealwithFedExtogivetheir

semitruckstheabilitytosendtelemetrydatatoHQinrealtime,overour

networkinruralAustralia.WeaddFedExtothesmartcontractlist,andnow

theycanpayeachdevicetosenddataontheirbehalf.”

FedExdriverscoulduse

themeshnetworkforcommunicationsandvehicletrackingacrossremoteareas

toindicateestimatedarrivaltimesandbreakdowns.Thenetworkcouldalertthe

nearestrepairfacilitytodispatchthenecessarypartsandequipment.

Blockchaintechnologyiscritical.ThisInternetofThings(IoT)application

dependsonaLedgerofThings.Withtensofthousandsofsmartpolescollecting

datathroughnumeroussensorsandcommunicatingthatdatatoanotherdevice,

computer,orperson,thesystemneedstocontinuallytrackeverything—

includingtheabilitytoidentifyeachuniquepole—toensureitsreliability.

“Nothingelseworkswithoutidentity,”saidJennings.“Theblockchainfor

identityisthecorefortheInternetofThings.Wecreateauniquepathforeach

device.Thatpath,thatidentity,isthenstoredinthebitcoinblockchainassigned

toFilament.Justlikeabitcoin,itcanbesenttoanyaddress.”

Theblockchain

(alongwithsmartcontracts)alsoensuresthatthedevicesarepaidforsothey

continuetowork.TheInternetofThingscannotfunctionwithoutblockchain

paymentnetworks,wherebitcoinistheuniversaltransactionallanguage.

SocialEnergy:PoweringaNeighborhood

Now,insteadofpoles,imaginedigitizingeverynodeinapowersystemtocreate

entirenewpeer-to-peermodelsofpowerproductionanddistribution.Everyone

getstoparticipateinablockchain-enabledpowergrid.UnderaNewYorkState–

sponsoredprogramtoincreaseenergyresiliencyeveninextremeweather

conditions,workisunderwaytocreateacommunitymicrogridinthePark

SlopeareaofBrooklyn.Oncebuilt,thismicrogridanditslocallygenerated

powerwillprovideresiliencyinemergenciesandreducecoststocustomers

whilepromotingclean,renewableelectricity,energyefficiency,andstorage

optionsinthecommunity.

Whilecampusmicrogridshavebeenaroundforawhile,theyaren’tcommon

inresidentialareas.Mosthomeowners,businesses,governments,andother

organizationsinurbanNorthAmericagettheirpowerfromregulatedutilitiesat

regulatedprices.Currently,wehavemorevarietyinlocallygeneratedrenewable

energyfrom,say,solarpanelsonrooftops.Thelocalutilitycapturesexcess

powerinitssupplyforredistributionatwholesalerates,oftenwithconsiderable

leakage.Theconsumer,whomaybelocatedacrossthestreetfromalocalpower

source,stillmustgothroughtheutilityandpayfullretailforrenewableenergy

generatedbytheirneighbor.It’sridiculous.

“Insteadofthecommand-and-controlsystemtheutilitieshavenowwherea

handfulofpeopleareactuallyrunningautilitygrid,youcandesignthegridso

thatitrunsitself,”saidLawrenceOrsini,cofounderandprincipalofLO3

Energy.“Thenetworkbecomesfarmoreresilientbecausealloftheassetsinthe

gridarehelpingtomaintainandruntheutilitygrid.”

It’sadistributedpeer-to-

peerIoTnetworkmodelwithsmartcontractsandothercontrolsdesignedinto

theassetsthemselves(i.e.,theblockchainmodel).

Whenahurricanedestroys

transmissiontowersorfirecripplesatransformersubstation,thegridcanquickly

andautomaticallyreroutepowertopreventamassiveblackout.

Resiliencyisn’ttheonlybenefit.Locallygeneratedpower,usedlocally,is

significantlymoreefficientthantheutility-scalemodel,whichrelieson

transmittingenergyacrossvastdistances,whereenergyislost.LO3Energyis

workingwithlocalutilities,communityleaders,andtechnologypartnersto

createamarketwhereneighborscanbuyandsellthelocalenvironmentalvalue

oftheirenergy.“So,insteadofpayinganenergyservicescompanythat’sbuying

renewableenergycredits,yougettopaythepeoplewhoareactuallygenerating

theelectricitythatisservingyourhouse,thatislocalandgreen,andthatactually

hasanenvironmentalimpactinyourneighborhood.Itseemsalotfairer,right?”

saidOrsini.

Right!

Ifyoucanlocateeachoftheassetsandassignlocationalvalueforgeneration

andconsumption,thenyoucancreateareal-timemarket.AccordingtoOrsini,

youcanauctionyourexcessenergytoyourneighborswhomightnotbeableto

generaterenewableenergy.Indoingso,yourcommunitycancreateenergy

resiliencythroughpeer-to-peertrading.Communitymemberscanreach

consensusontherulesofthereal-timemicrogridmarketsuchastime-of-day

pricing,floororceilingprices,prioritygiventoyournearestneighbor,orother

parameterssoastooptimizepriceandminimizeleakage.Youwillnotbesitting

atyourcomputeralldaylongsettingprices,offeringtobuyorsell.

Futuremicrogridswillharvestheatfromthecomputationalpowerneededto

createandsecurethistransactivegridplatform.Distributingthecomputing

powertobuildingsinthecommunityandusingthehighertemperatures

generatedtopowerheating,hotwater,andair-conditioningsystemsincreasesthe

productivityofthesameenergy.“OurfocusisonincreasingExergy,”says

Orsini.

Withincreasinggenerationofrenewablepoweratthelocallevel,theInternet

ofThingsischallengingtheregulatedutilitymodel,andnotamomenttoosoon.

Weneedtorespondtoclimatechangeandbraceourselvesforincreasingly

extremeweatherconditions,particularlymeltingicecapsthatdrownislandsin

oceans,anddroughtsthatturndrylandintodesert.Currently,we’relosingabout

fifteenmillionacresperyeartodesertification,theworstlossesinsub-Saharan

Africawhere,unliketheMunroesoftheoutback,peoplecan’taffordwater

pumps,air-conditioning,ormigration.

Weneedourutilitygridsandourengines

nottoleachenergyandcarbonintoouratmosphere.Whiletheutilitiesare

lookingatIoTbenefitstotheirexistinginfrastructure(“smartgrid”),connecting

microgridscouldleadtoentirelynewenergymodels.Utilitycompanies,their

unions,regulators,andpolicymakers,aswellasinnovativenewentrantssuchas

LO3,areexploringthesenewmodelsforgenerating,distributing,andusing

electricityfirstattheneighborhoodlevelandthenaroundtheworld.

THEEVOLUTIONOFCOMPUTING:FROMMAINFRAMESTO

SMARTPILLS

Unlikeourenergygrid,computingpowerhasevolvedthroughseveral

paradigms.Inthe1950sand1960s,mainframesruled—InternationalBusiness

MachinesandtheWild“BUNCH”(Burroughs,Univac,NationalCashRegister

Corp.,ControlData,andHoneywell).Inthe1970sand1980s,minicomputers

explodedontothescene.TracyKiddercapturedtheriseofDataGeneralinhis

1981bestsellerTheSoulofaNewMachine.Likemainframecompanies,most

ofthesefirmsexitedthebusinessordisappeared.WhoremembersDigital

EquipmentCorporation,PrimeComputer,Wang,Datapoint,orthe

minicomputersofHewlett-PackardorIBM?In1982,IBMhardwareand

MicrosoftsoftwarebroughtusthedecadeofthePC,withApple’sMacintosh

barelynippingattheirheels.Howthingschange.

Drivenbythesametechnologicaladvances,communicationsnetworks

evolved,too.Fromtheearly1970s,theInternet(originatingintheU.S.

AdvancedResearchProjectsAgencyNetwork)wasevolvingintoitspresent-

day,worldwide,distributednetworkthatconnectsmorethan3.2

billionpeople,

businesses,governments,andotherinstitutions.Thecomputingandnetworking

technologiesthenconvergedinmobiletabletsandhandhelds.BlackBerry

commercializedthesmartphoneintheearlyaughts,andApplepopularizeditin

theiPhonein2007.

Whatisrelativelynewandveryexcitingistheabilityofthesedevicestogo

beyondrelativelypassivemonitoring,measuring,andcommunicating(weather

patterns,trafficpatterns)tosensingandresponding;thatis,executinga

transactionoractingaccordingtopredefinedrulesofengagement.Theycan

sense(fallingtemperatures,trafficjams)andrespond(turnonthefurnace,

lengthenthegreenlight);measure(motion,heat)andcommunicate(emergency

services);locate(burstwatermain)andnotify(repaircrews);monitor(location,

proximity)andchange(direction);identify(yourpresence)andtarget(marketto

you),amongmanyotherpossibilities.

Thedevicescanbestatic(poles,trees,pipelines)ormobile(clothing,

helmets,vehicles,pets,endangeredanimals,pills).Caregiversareusingsmart—

oredible—electronicpills,forexample,toidentifyandrecordwhetherandwhen

apatienttakeshismedication.Askinpatchortattoocapturesthedataandcan

measureheartrate,foodconsumption,orotherfactorsandcommunicatethis

informationtoaphysician,caregiver,orthepatienthimselfthroughanappto

identifypatternsandgivefeedback.Themedicalprofessionwillsoonbeusing

similartechnologyfortargeteddrugdeliverytocertaintypesofcancer,

measuringcoretemperatureandotherbiomarkers.

Thedevicescancommunicatewithoneanother,withcomputersand

databasesdirectlyorthroughthecloud,andwithpeople(sendyouatext

messageorcallyourmobile).Thesedevices,throughtheirevolvingmachine

intelligenceandthedatatheycollect,areputtinganalysisofdata,pattern

recognition,andtrendspottingintoindividualhands.

Theindustrytermbig

datahardlydescribesthemyriaddatathatthephysicalworldwillgenerate.By

themostconservativeestimate,the10billionorsodevicesconnectedviathe

Internettodaywillgrowtomorethan25billionby2020.

Callit“infinitedata”

frominfinitedevices.

Sowhydon’tweliveinsmarthomesanddrivesmartcarsandpracticesmart

medicine?Weseesixbigobstacles.OneistheRubeGoldbergrolloutof

applicationsandservices.Simplyput,fewoftheearlyconsumerIoTdevices

havedeliveredpracticalvalue,unlessyouwantyoursmokedetectortoaskyour

nightlighttocallyoursmartphoneandwarnyouofafire.

Anotherisorganizationalinertiaandtheunwillingnessorinabilityof

executives,industryassociations,andunionstoenvisionnewstrategies,business

models,androlesforpeople.Whilesomecreativeentrepreneurshavedeveloped

newbusinessesonsomeoftheseprinciples(i.e.,enablingphysicalassetstobe

identified,searched,used,andpaidfor)andtherebydisruptedexistingmarkets

(e.g.,Uber,Airbnb),theimpactisstillcomparativelyminorandreliantupona

companyanditsappasintermediary.

Athirdisfearofmalicioushackersorothersecuritybreachesthatcould

modifytheinformationandrulesofengagement,overridingdeviceswith

potentiallydisastrousconsequences.Afourthisthechallengeof“future-

proofing,”criticalforcapitalthingswithverylonglifespans,longerthanthelife

spanofatypicalapplicationorevenacompany.Start-upsgobankruptorsell

themselvestolargerfirmsallthetime.

Afifthisscalability;torealizethefullvalueoftheIoT,wemustbeableto

connectmultiplenetworkstogethersothattheyinteroperate.Lastisthe

overarchingchallengeofcentralizeddatabasetechnology—itcan’thandle

trillionsofreal-timetransactionswithouttremendouscosts.

Toovercometheseobstacles,theInternetofEverythingneedstheLedgerof

Everything—machines,people,animals,andplants.

THEINTERNETOFTHINGSNEEDSALEDGEROFTHINGS

WelcometotheInternetofEverythingenabledbytheLedgerofEverything—

distributed,reliable,andsecureinformationsharing,sensing,andautomating

actionsandtransactionsacrosstheInternet,thankstoblockchaintechnology.

Technologistsandsciencefictionwritershavelongenvisionedaworldwherea

seamlessglobalnetworkofInternet-connectedsensorscouldcaptureevery

event,action,andchangeonearth.Withubiquitousnetworks,continued

advancementsofprocessingcapability,andanincreasingarrayofcheapandtiny

connecteddevices,thatvisionofan“InternetofThings”isedgingcloserto

reality.

Remember,SatoshiNakamotodesignedthebitcoinblockchaintoensurethe

integrityofeachbitcointransactiononlineandthebitcoincurrencyoverall.By

recordingeachtransactionateverynodeandthensharingthatrecordwithevery

othernodeonthenetwork(i.e.,theblockchain),theblockchainensuresthatwe

canverifythetransactionquicklyandseamlesslyacrossthepeer-to-peer

network.Wecanconducttransactionsofvalue—inthiscasefinancial—

automatically,securely,andconfidentlywithoutneedingtoknowortrusteach

nodeonthenetwork,andwithoutgoingthroughanintermediary.TheLedgerof

Everythingrequiresminimaltrust.

Blockchaintechnologyenablesustoidentifysmartdeviceswithrelevant

coreinformationandprogramthemtoactunderdefinedcircumstanceswithout

riskoferror,tampering,orshuttingdownintheAustralianoutback.Becausethe

blockchainisanincorruptibleledgerofalldataexchangesthatoccurinthe

network,builtupovertimeandmaintainedbythecollaborationofnodesinthat

particularnetwork,theusercanbesurethedataareaccurate.

Thereisgrowingagreementamongtechnologycompaniesthatthe

blockchainisessentialtounlockingthepotentialoftheInternetofThings.None

otherthanIBM,theprogenitoroflarge,centralizedcomputersystems,hascome

onboard.Inareport,“DeviceDemocracy:SavingtheFutureoftheInternetof

Things,”IBMidentifiedthevalueoftheblockchain:

InourvisionofadecentralizedIoT,theblockchainistheframework

facilitatingtransactionprocessingandcoordinationamonginteracting

devices.Eachmanagesitsownrolesandbehavior,resultinginan

“InternetofDecentralized,AutonomousThings”—andthusthe

democratizationofthedigitalworld...devicesareempoweredto

autonomouslyexecutedigitalcontractssuchasagreements,payments

andbarterswithpeerdevicesbysearchingfortheirownsoftware

updates,verifyingtrustworthinesswithpeers,andpayingforand

exchangingresourcesandservices.Thisallowsthemtofunctionasself-

maintaining,self-servicingdevices....

Therefore,byusingtheblockchain,wholenewbusinessmodelsopenup

becauseeachdeviceornodeonthenetworkcouldfunctionasaself-contained

microbusiness(e.g.,sharingpowerorcomputingcapabilityatverylowcost).

“Otherexamplesareamusicservice,oranautonomousvehicle,”notedDino

MarkAngaritis,founderofSmartwallet.“Eachsecondthatthemusicisplaying

orthecarisdrivingit’stakingafractionofapennyoutofmybalance.Idon’t

havealargepaymentupfrontandpayonlyforwhatIuse.Theproviderrunsno

riskofnonpayment.Youcan’tdothesethingswithtraditionalpaymentnetworks

becausethefeesaretoohighforsendingfractionsofapennyoffyourcredit

card.”

Sparebedrooms,emptyapartments,orvacantconferenceroomscouldrent

themselvesout.Patentscouldlicensethemselves.Oure-mailcouldcharge

spammersforeachitemreceived.Yougettheidea.Withmachinelearning,

sensors,androbotics,autonomousagentscouldmanageourhomesandoffice

buildings,interactivesalesandmarketing,busstopshelters,trafficflowandroad

usage,wastecollectionanddisposal(i.e.,wherethebinsspeaktothetrucks),

energysystems,watersystems,healthcaredevicesembeddedorworn,

inventories,factories,andsupplychains.

CarlosMoreira,CEOofWISeKey,saidthatthegreatestopportunitiesliein

whathecalledtheindustrialblockchain.

WISeKey,aSwiss-basedcompany

workingintheareaofidentitymanagement,cybersecurity,andmobile

communications,providessecuretransactionalcapabilitytowatchesandother

wearabledevicesandisnowofferingitstrustmodeltomanufacturersandchip

makersforoutfittingaverylargenumberofotherIoTdevicestobe

authenticatedandtocommunicateacrosstheInternetorothernetwork.“Weare

movingintoanotherworldwherethetrustisdelegatedattheobjectlevel.An

objectthatisnottrustedwillberejectedbytheotherobjectsautomatically

withouthavingtocheckwithacentralauthority,”Moreirasaid.“Thisisahuge

paradigmshiftthathastremendousconsequencesinthewaythatprocesseswill

beconductedintheyearstocome.”

Inthisemergingworld,usersconnectwithsmartdevicesusingsecure

identificationandauthentication,potentiallypublic/privatekeys,andtheydefine

therulesofengagement,suchasprivacy,withotherdevices,ratherthangoing

alongwiththerulesofacentralizednodeorintermediary.Manufacturerscan

transfermaintenance,ownership,access,andresponsibilitytoacommunityof

self-maintainingdevices,future-proofingtheIoTandsavinginfrastructurecosts,

replacingeachdeviceexactlywhenithitsobsolescence.

ThustheblockchaincanaddressthesixobstaclestoafunctioningInternetof

Things.Tosumup,thenewLedgerofEverythinghasnineniftynetwork

features:

ResilientSelf-corrects;nosinglepointoffailure

RobustCanhandlebillionsofdatapointsandtransactions

Real-timeStayson24/7/365anddataflowsinstantly

ResponsiveReactstochangingconditions

RadicallyopenConstantlyevolvesandchangeswithnewinput

RenewableCanbemultipurpose,reused,andrecycled

ReductiveMinimizescostsandfriction,maximizesprocessefficiency

Revenue-generatingEnablesnewbusinessmodelsandopportunities

ReliableEnsuresintegrityofdata,trustworthinessofparticipants

WhydowebelievetheIoTenabledbytheblockchainhassuchhuge

potential?Theprimarydriveristhatitallowsanimationofthephysicalworld.

Oncewebringtheseobjectstolifeontheledger,theycansense,respond,

communicate,andtakeaction.Assetscansearch,find,use,andcompensateone

anotheraccordingtosmartcontracts,therebyenablinghighlydisruptivenew

markets,justastheInternethaspreviouslydoneforpeopleandallmannerof

digitalcontent.

Thequestionsformanagers,entrepreneurs,andcivicleaders:Howwillyou

takeadvantageofthesenewopportunitiestochangeandgrow?Howwillyour

organizationrespondtotheinevitabledisruptiontoyourexistingoperational

model?Howwillyoucompetewiththecreativenewmodelsofstart-upsand

collaborations?

Opportunitiesforgreaterefficiency,improvedservice,reducedcosts,

increasedsafety,andbetterresultsaboundinourlives,andwecanimproveeach

byapplyingblockchainlogictotheInternetofThings.We’rebeginningthenext

majorphaseofthedigitalrevolution.MichelleTinsleyofIntelexplainedwhy

hercompanyisdeeplyinvestigatingtheblockchainrevolution:“WhenPCs

becamepervasive,theproductivityrateswentthroughtheroof.Weconnected

thosePCstoaserver,adatacenter,orthecloud,makingitreallycheapandeasy

forleanstart-upstogetcomputerpowerattheirfingertips,andwe’reagain

seeingrapidinnovation,newbusinessmodels.”

Intelwantstoacceleratethe

processofunderstandingwhat’sworking,what’snotworking,andwherethe

opportunitieslie.“Wecouldseethistechnologybeawholeotherstepfunction

ofinnovation,whereitenablesallsortsofnewcompanies,newplayers.Tobea

leaderinthetechnologyindustry,wecannotbeabsentfromtheconversation,”

shesaid.

Justimaginethepotentialofapplyingthesecapabilitiesacrossmany

typesofbusinesses,manyuntouchedbytheInternetrevolution.

THETWELVEDISRUPTIONS:ANIMATINGTHINGS

Whatpossibilitiesarethereforanimatingthephysicalworld?UnlikePinocchio,

wedon’thaveaBlueFairy.(AndunlikePinocchio,theblockchaindoesn’tlie.)

Buttoday,rightnow,wehavedistributedledgertechnologythatwillactually

enablenotonlyGEto“bringgoodthingstolife.”Evenbetter,Pinocchiocan’t

golong-noseontheledger.

We’reintheearlydaysofthinkingaboutthepossibilitiesoftheLedgerof

Everything(builtintotheIoT).Whileconsumerdeviceshavereceivedthemost

attentioninthepopularmediatodate,therearepotentialapplicationsacross

virtuallyeverysector.Therearemanywaysofclassifyingandgroupingpotential

applicationsbecausesomanyapplicationscrossboundariesandcouldfitinto

morethanonecategory.McKinsey,forexample,usestheconceptofsettingsin

itsclassificationoftheIoT.

We’veidentifiedopportunitiesfortheLedgerof

Everythingintwelvemajorfunctionalareas.Specificbenefits—andthebusiness

case—willbespecifictoeachapplication.Thecategoriesbelowillustratethe

potentialandthepotentialsignificantdisruptiontoexistingmarkets,players,and

businessmodels.

1.Transportation

Inthefuture,you’llcallupanautonomousvehicletogetyousafelywhereyou

needtogo.Itwillintuitivelytakethefastestroute,avoidconstruction,handle

tolls,andparkallonitsown.Intimesoftrafficcongestion,yourvehiclewill

negotiateapassingratesothatyouarriveatyourdestinationontime,and

freightmanagerswillusetheblockchain-enabledIoTonallcargotoclear

customsorotherrequiredinspectionsquickly.Noredtape.Allianz,a

manufacturerofstreetsweepers,couldequipitsmunicipalmachineswith

minicamorsensortechnologythatidentifiedcarswhoseownershadn’tmoved

them(iftheycouldn’tmovethemselves)onalternate-side-of-the-street-parking

daysinNewYorkCity,feedthatsensordatatothetrafficpolice,andsparethe

physicalwritingofparkingtickets.Or,thestreetsweeperitselfcouldextractthe

parkingfineinbitcoinfromthecaritselfasitsweptby—becausetheNewYork

StateDepartmentofTransportationwouldrequireallcarsregisteredinthefive

NewYorkCityboroughstomaintainbitcoinwalletsconnectedtotheirlicense

plates.Autonomousvehicles,ontheotherhand,wouldsensetheoncoming

sweeperandsimplymovethemselvestoletitpass.

2.InfrastructureManagement

Manyprofessionalswillusesmartdevicestomonitorlocation,integrity,age,

quality,andanyotherrelevantfactorsofpavement,raillines,powerpolesand

lines,pipelines,runways,ports,andotherpublicandprivateinfrastructurein

ordertomonitorconditions,detectproblems(e.g.,breakageortampering),and

initiatearesponsebothrapidlyandcost-effectively.That’swherecompanies

suchasFilamentwillcomein,withnewaffordabletechnologiestoanimate

existinginfrastructurewithoutthehugecapitalrequiredtoreplaceit.Eric

JenningsofFilamentestimatesthat“over90percentofinfrastructureis

currentlydisconnected,andit’sunfeasibletoripitalloutandreplaceitwith

brand-new,wireless,connectedassets.”

3.Energy,Waste,andWaterManagement

“Sendatrucktoemptyme,”saidtheoverflowingwastebin.“Fixme,”saidthe

leakypipe.TheInternetofThingsshouldinspireahundrednewchildren’s

books.Traditionalutilitiesinboththedevelopedanddevelopingworldcanuse

theblockchain-enabledIoTfortrackingproduction,distribution,consumption,

andcollection.Aswe’vealreadyseen,newentrantswithoutsignificant

embeddedinfrastructureareplanningtousethesetechnologiestocreateentirely

newmarketsandnewmodels(e.g.,communitymicrogrid).

4.ResourceExtractionandFarming

Cowscanbecomeblockchainappliances,enablingfarmerstotrackwhatthe

cowseat,whichmedicationsthey’vehad,andtheircompletehealthhistory.This

technologycanalsohelptrackexpensiveandhighlyspecializedequipmentand

makeitmorewidelyavailableforjust-in-timeusageandcostrecovery;improve

minerandfarmworkersafetythroughtaggingofsafetyequipmentand

automatedchecklists(toensurethatequipmentisbeingusedproperly);monitor

weather,soil,andcropconditionstostartirrigation,automatedharvesting,or

otheractions;andcompile“infinitedata”analyticstoidentifynewresourcesor

adviseonagriculturalbestpracticesbasedonpastpatternsandresults.Sensors

insoilandontreescouldhelpenvironmentalprotectionagenciestomonitor

farmersandtheirusageoftheland.

5.EnvironmentalMonitoringandEmergencyServices

RememberautonomousweatheragentBOB?BOBwillliveinaworldof

weathersensorsandmakemoneycollectingandsellingcriticalweatherdata.

Exampleshereincludemonitoringairandwaterqualityandissuingalertsto

reducepollutantsorstayindoors;flaggingdangerouschemicalsorradioactivity

foremergencyworkers;monitoringlightningstrikesandforestfires;installing

earthquakeandtsunamiearlywarningandalertsystems;and,ofcourse,storm

monitoringandearlywarning.Inadditiontoimprovingtheresponsetimefor

emergencyservicesandreducingtheriskoftheseeventstohumanlife,wecould

usethislongitudinaldatatoincreaseourunderstandingofunderlyingtrendsand

patterns,identifypreventivemeasuresinsomecases,andimproveourpredictive

capabilitytoprovideevenearlierwarning.

6.HealthCare

Inthehealthcaresector,professionalsusedigitizationtomanageassetsand

medicalrecords,keepinventory,andhandleorderingandpaymentsforall

equipmentandpharmaceuticals.Today,hospitalsarefullofsmartdevicesthat

overseetheseservices,butfewcommunicatewithoneanotherortakeinto

accounttheimportanceofprivacyprotectionandsecurityindirectpatientcare.

Blockchain-enabledIoTcanuseemergingapplicationstolinktheseservices.

Applicationsindevelopmentincludemonitoringanddiseasemanagement(e.g.,

smartpills,wearabledevicestotrackvitalsignsandprovidefeedback)and

improvedqualitycontrol.Imagineanartificialhiporkneethatmonitorsitself,

sendsanonymizedperformancedatatothemanufacturerfordesign

improvements,andcommunicateswithapatient’sphysician,“Timetoreplace

me.”Technicianswillbeunabletousespecializedequipmentiftheyhaven’t

takenprerequisitestepstoensuretheirreliabilityandaccuracy.Newsmartdrugs

couldtrackthemselvesinclinicaltrialsandpresentevidenceoftheir

effectivenessandsideeffectswithoutriskofmodifiedresults.

7.FinancialServicesandInsurance

FinancialinstitutionscouldusesmartdevicesandtheIoTtotagtheirclaimson

physicalassets,makingthemtrackableandtraceable.Becausedigitalcurrencies

enablethestorageandtransferofvaluerapidlyandsecurelyforalluserslarge

andsmall,theyalsoenableriskassessmentandmanagement.Thinkingfurther,

couldthepooranddisadvantagedearnsmallamountsofcash,orperhaps

electricityorother“credits,”iftheyallowedtheirlimitedassetstobetaggedand

sharedasintheearliermicrogridexample?Ownerswillbeabletotagpriceless

objects,antiquities,jewelry,thestuffofmuseums,anythingeverhandledby

Sotheby’sandinsuredbyLloyd’s.Insurerscouldadjustpaymentaccordingto

wheretheobjectisanditsenvironment—ifit’sinNewYork’sMetropolitan

MuseumofArtundercontrolledclimate,thenalowerinsurancerate;iftraveling

toGreece,thenchargeahigherrate.Theobjectcouldtellwhetheritwasina

vaultoraroundacelebrity’sneck.Insuranceratescouldbehigherifthedevice

washangingonLindsayLohan’sneckversus,say,AnneHathaway’s.Driverless

carswouldsurelyhavelowerinsurancerates,anddevicesthemselvescould

settleinsuranceclaimsonthespotbasedonsensordata.

8.DocumentandOtherRecordKeeping

Aswehaveexplained,physicalassetscanbecomedigitalassets.All

documentationrelatingtoaparticular“thing”canbedigitizedandcarriedonthe

blockchainincludingpatents,ownership,warranties,inspectioncertification,

provenance,insurance,replacementdates,approvals,etcetera,significantly

increasingdataavailabilityandintegrity,reducingpaperworkhandling,storage,

andloss,andotherprocessimprovementsrelatedtothatdocumentation.For

example,avehiclewillnotstartifitfailedarecentsafetyinspection,ifits

liabilityinsurancehasexpired,ifitsownerhasfailedtopayparkingticketsor

movingviolations,orifthedriver’slicenseofthepersonattemptingtodriveit

hasbeensuspended.Itemsontheshelveswillnotifystoremanagerswhen

they’vepassedtheir“sellby”date.Storemanagersmightevenprogramthese

itemstolowertheirownpriceasthesell-bydateapproaches.

9.BuildingandPropertyManagement

Anestimated65percentofthetwelvebillionsquarefeetofcommercialreal

estateintheUnitedStatesisvacant.

Digitalsensorscancreatemarketplacesof

theserealestateassetsbyenablingreal-timediscovery,usability,andpayment.

Vendorsarenowenteringthisfieldanddevelopingnewservicemodelstorent

thespaceinoffhours.Intheevenings,yourconferenceroomcanmoonlightasa

classroomforneighborhoodyouthoranofficeforalocalstart-up.Other

applicationswillincludesecurityandaccesscontrol,lighting,heating,cooling,

andwasteandwatermanagement.Thegreenestofbuildingswillrunonthe

LedgerofThings.Imaginethedataonelevatorusageandflowofpeoplethrough

thebuilding,howthesewillinformanarchitect’sdesignofpublicandprivate

spaces.SpareresidentialspacecanlistitselfandnegotiatethroughtheLedgerof

Everythingtohelptourists,students,managersofhomelessshelterprograms,

andothersfindspacethatmeetstheirneeds.Theseideasapplytoalltypesof

residential,hotel,office,factory,retail/wholesale,andinstitutionalrealestate.

10.IndustrialOperations—TheFactoryofThings

TheglobalplantfloorneedsaglobalLedgerofThings,akatheindustrial

blockchain.Factorymanagerswillusesmartdevicestomonitorproduction

lines,warehouseinventory,distribution,quality,andotherinspections.Entire

industriesmayadopttheledgerapproachtosignificantlyincreaseefficiencyfor

suchprocessesassupplychainmanagement.Largeandcomplexmachines,like

airplanesandlocomotives,consistofmillionsofparts.Eachindividual

componentofajetengineorrailcarcouldhavesensorsthatsendoutanalert

whenitneedsfixing.ImagineatrainonitswayfromBaltimoretoLongBeach

notifyingthemaintenancecrewinLongBeachthreedaysaheadoftimethatit

neededacriticalnewpart.ThesensorcouldevenissueanRFPandacceptthe

bestbidanddeliveryforthepart,cuttingtimeandmassivecostoutofthe

operatingefficienciesoflargecorporationslikeGeneralElectric,Norfolk

Southern,andothers.Evenmoresignificant,manufacturersinrealmsfromcars

tolightbulbstoBand-Aidsareinvestigatinghowtheycanembedsmartchips

intotheirproductsorpartsthereofandmonitor,collect,andanalyzeperformance

data.Withsuchdata,theycouldprovideautomaticupgrades,anticipateclient

needs,andoffernewservices,ineffectchangingfromproductsuppliersto

ongoingsoftware-basedservices.

11.HomeManagement

Feelinglonely?Youcanalwaystalktoyourhouse.Yourownhomeand

numerousproductsandservicesareenteringthemarkettoallowautomatedand

remotehomemonitoring.Theseservicesgobeyondthe“nannycam”toinclude

accesscontrols,temperatureadjustments,lighting,and,eventually,justabout

everythingelseinyourhome.While“smarthomes”havebeenrelativelyslowto

takeoff,companiessuchasApple,Samsung,andGoogleareworkingto

simplifyinstallationandoperations.AccordingtoBCCResearch,“TheU.S.

homeautomationmarketisestimatedtogofromalmost$6.9billionin2014to

$10.3billionin2019...thegrowthwillbesteadyandlong-term.”

12.RetailOperationsandSales

Walkingdownthestreet,yourmobiledeviceadvisesyouthatthedressyoulove

isavailableattheGap.Walkintothestoreandthedress,inyoursize,iswaiting

foryou.Aftertryingiton,youscanitandthepaymentiscomplete.Butyou’ve

gototherthingstodo,sothedressfindsitswaytoyourhousebeforeyouget

home.Inadditiontooperationalefficienciesandenvironmentalmonitoring,

retailerswillbeabletopersonalizeproductsandservicestoidentifiable

customersastheywalkordrivebybasedontheirlocation,demographics,

knowninterests,andpurchasinghistory,providedthatthosecustomersopened

theirblackboxestoretailersontheblockchain.

THEECONOMICPAYOFF

Throughoutthischapterwe’vereferencednumerouspotentialbenefitsofthe

distributed,blockchain-enabledIoTatmanylevels(individual,organizational,

industrial,societal).Redesigningandautomatingprocessesacrosspeer-to-peer

networks,ratherthanthroughpeopleorcentralizedintermediaryapps,could

bringnumerousbenefitsasalreadyidentifiedincluding:

Speed(end-to-endautomation)

Reducedcosts(associatedwithsendingnearlyinfiniteamountsofdata

togiantcentralprocessingfacilities;eliminationofexpensive

intermediaries)

Increasedrevenue,efficiency,and/orproductivity(freeingupexcess

capacityforreuse)

Improvedeffectiveness(built-inchecklistsandotherprotocolsreduce

impactofhumanerror)

Increasedsecurityandintegrity(person-to-persontrustisnotrequired

astrustisdesignedintothenetworkarchitecture)

Reducedlikelihoodofsystemfailure(eliminationofbottlenecks,built-

inresiliency)

Reducedenergyconsumption(energyrequiredbythenetworkitself

offsetbyincreasedefficiencyandreducedwastage,dynamicpricing,

andfeedbackloops)

Increasedprivacyprotection(intermediarycan’toverrideorignore

rulesdefinedintheblockchain)

Improvedunderstandingofunderlyingpatternsandprocessesand

opportunitiestoimprovethemthroughthecollectionandanalysisof

“infinitedata”

Strengthenedpredictivecapabilityofvariouseventswhethernegative

(severeweather,earthquakes,failinghealth)orpositive(besttimeto

plantcrops,buyingpatterns).

ThedistributedopenmodelmeansthatIoTnetworkscanbeself-sustaining

evenafteracompanypullsoutoramanufacturerfails.Interoperability,when

designedintothesystem,willenabletheconnectingofdifferentIoTnetworks

andwillunleashevengreatervalue.

Manyofthesebenefitsdependupontheconceptsofdistributed,or

decentralized,networksandtheeliminationofacentral(e.g.,commandand

control)orotherintermediary(e.g.,aclearinghouseormanagementapp).Once

thesenewintermediariesareinplace,otherswillfeelpressureto“workaround”

oreliminatethem.InEricJennings’sview,“Peoplewilldothethingsthey’lldo

tominimizetheirowndiscomfort,leadingtosilosandconcentrationand

centralization.What’sashort-termgainforthoseparticularpeopleisalong-term

lossforeveryoneelse.”Hesaid,“TheInternetofThingsshouldbecompletely

decentralizedwheredevicescanbeautonomous,discovereachotherdirectly,

establishsecurecommunicationwitheachotherdirectly,andeventuallypay

eachotherinvalue,directlybetweenmachines.”

TheIBMInstituteforBusinessValuehasconductedresearchintowhatit

callsthefivemajor“vectorsofdisruption”thatwillincreaseourleverageof

physicalassetsastheresultoftheblockchain-enabledIoT.

WhileIBMclearly

hasabusinessinterestintheIoT,itsworkonbusinessvalueisnonethelessvery

helpful.

First,theinstitutenotedthatthesenewnetworkswillenableusersto

instantlysearch,access,andpayforavailablephysicalassets,suchas

underutilizedstorageorcomputingcapability.Theassetsinsupplycanmatch

themselvestodemand.Becausewecanassessriskandcreditautomatically

onlineandrepossessvirtually,wecanrepricecreditandrisksignificantly

downward.Automatedusageofsystemsanddevicesimprovesoperational

efficiency.Finally,firmscancrowdsource,collaborate,andoptimizewith

businesspartnersinrealtimethroughdigitallyintegratedvaluechains.

Inshort,youhaveanopportunitytomakeconceptuallysimpler,more

efficientmarkets.Youcanaccesspreviouslyinaccessibleassets,determineprice

inrealtime,andreduceyourrisk.Oncethebasicinfrastructureisinplace,

barrierstoentryarelow(e.g.,justdevelopanapp),andtheongoingcostsalso

relativelylow(e.g.,nomorethird-partyservicefees).Itdrasticallylowersthe

costoftransmittingfundsandlowersthebarriertohavingabankaccount,

obtainingcredit,andinvesting.Itcouldevensupportmicropaymentchannels,

matchingminute-by-minuteserviceusagewithminute-by-minutepayment.

TheLedgerofThingsenables“distributedcapitalism,”notjustredistributed

capitalism.Farfromafree-for-all,thesemarketscanbeshapedaccordingtoour

values—asindividuals,companies,andsocieties—andthesevaluescodedinto

theblockchain,suchasincentivestouserenewableenergy,useresourcesfrom

ourclosestneighborsfirst,honorpricecommitments,andprotectprivacy.In

short,theLedgerofEverythingontopoftheIoTanimatesandpersonalizesthe

physicalworldevenaswesharemore.AsIBMstated,“Atamacroeconomic

level,weareallwinnersintheIoTfuture,eventhoughdifferentindustrieswill

experienceamixofdifferenteffects.”

AccordingtotheMcKinseyGlobal

Institute,theeconomicvalueoftheIoThas,ifanything,beenunderestimated;

theeconomicimpact—includingconsumersurplus—couldbeasmuchas$11.1

trillionperyearin2025forIoTapplications.

That’sa10percentliftoncurrent

globalGDPofwellover$100trillion;that’shuge!

Networkedintelligence,aphrasecoinedinTheDigitalEconomy,referredto

howthenetworkwouldbesmarterthanitssmartestnodeinonedomainafter

another.Aswehaveexplained,thefirstgenerationoftheInternetdropped

transactioncostssomewhat.Wehavefastersupplychains,newapproachesto

marketing,andpeer-to-peercollaborationslikeLinuxandWikipediaona

massivescale,withmanyinnovativenewbusinessmodels.Blockchain

technologywillacceleratethisprocess.AstheInternetofThingstakeshold,

thesetrendswillgointohyperdrive.

THEFUTURE:FROMUBERTOSUBER

We’vecoveredalotofgroundinthischapter.Nowlet’spullallthestrandsof

innovationtogetherinjustonescenario.

ConsiderserviceaggregatorslikeUberandLyft.Uberisanapp-basedride-

sharingnetworkofdriverswhoarewillingtogiveotherpeoplealiftforafee.

TouseUber,youdownloadtheUberapp,createanaccount,andprovideUber

withyourcreditcardinformation.Whenyouusetheapptorequestacar,itasks

youtoselectthetypeofcaryouwantandmarksyourlocationonamap.The

appwillkeepyoupostedontheavailabilityandwhereaboutsofyourprospective

driver.Attheendoftheride,Uberautomaticallychargesyourcreditcard.Ifyou

don’twanttogivethedefaulttip,thenyouneedtochangeyourbillingsettings

onUber’sWebsite.

UberTechnologies,Inc.,thecompanybehindthe

developmentandoperationoftheUberapp,retainsashareofthepricepaidfor

everyride.

Itsoundsgreat,particularlyincitieswithasmalltaxifleet.ButUber’s

servicescomewithanumberofproblemsandredflags.Driveraccountshave

beenhacked,ridesaresubjecttosurgepricing,andpassengershavebeensubject

torecklessdrivingandsexualharassmentorassault.

Uberisalsotracking

users’everymove,releasingsomeofthisinformationtocityofficialsfortraffic

studies.Totopitalloff,driverscreateconsiderablevaluebuttheygettokeep

onlypartofit.

Nowlet’simaginetheUberexperienceifitwereadistributedapplicationon

theblockchain.MikeHearn,aformerGoogleemployeewhoquithisjobtowork

fulltimeonbitcoin,laidoutthisalternativeuniversebasedonbitcoin

technologyatthe2013TuringFestival.

Hearncalledthisnetwork“TradeNet”

anddescribedhow,withthehelpofbitcoin,peoplecouldbegintorelyon

driverlessvehicles.

Itworkslikethis.Mostpeopledon’towncars,butrathersharevehiclesina

commons.InChicago,MelissarequestsacarthroughSUber(thinkblockchain

SuperUber).Alltheavailablevehiclesstartautomaticallypostingoffers,which

Melissa’snoderanksandpresentstoherbasedonherselectioncriteria.Melissa

factorsinhowmuchshe’swillingtopayforfasterroutes(e.g.,higher-pricedtoll

lanes).

MeanwhileJohn,unlikemostusers,isaSUbervehicleownerandashis

self-drivingcaristakinghimtowork,itidentifiesalltheparkingoptions,both

publicandprivatelyowned,selectsaspace,andreservesandpaysforitthrough

anautonomousparkingmarketplace.BecauseJohn’spredeterminedparameters

alwaysincludeseekingthecheapestavailablespotwithinaten-minutewalkof

hisdestination,healmostalwaysgoeswithhiscar’sfirstchoice.Theunderlying

parkingdatabasethatsupportstheparkingalsocontainsinformationonparking

rulesforspecificstreetsondifferentdaysandatdifferenttimesofday,whether

ornottheparkingspaceiscoveredorintheopen,orwhethertheownerofthe

spacehasestablishedaminimumprice.Allthisrunsonadistributedpeer-to-

peerplatform—connectingmultipleapps—sonocentralizedcompanyis

mediatingtheordersortakingpartofthefee.Thereisnosurgepricingandno

unexpectedfees.

Whatisstrikingaboutthisproposedmodelisnotthedriverlessvehicles,

becauseself-drivingcarswillbecommonplace—probablysoonerratherthan

later.Rather,thecarscouldbefullyautonomousagentsthatearntheirownfares,

payfortheirownfuelandrepair,gettheirownautoinsurance,negotiateliability

incollisions,andoperate(“drive”)withoutoutsidehumancontrol,exceptwhen

theyneedtotakesomeentity—maybeahumanbeing—tocourt.

Asaconditionofoperating,SUberadministratorscouldprogramthe

vehicles’protocolsintotheblockchaintoobeyalltrafficrules,takethemost

direct,fastest,orleastexpensiveroute,andhonortheirbids.Thedrivers’initial

entryandregistrationintotheSUbersystemcouldrequirevehiclestoregister

necessarydocumentationincludingownership,safetyinspections,andinsurance,

andthesystemwouldpermanentlylogtheserecordstoensurereinspectionor

insuranceandpermitrenewalsasrequired.Sensorscouldmonitortheoverall

“health”ofthevehicleandsignalnecessaryrepairs,maketheappointmentatthe

appropriaterepairshop,andpreorderanynecessaryparts.Becausethevehicles

aredriverless,they’renotsubjecttosarcasm,cronyism,sexism,racism,orother

formsofhumandiscriminationorcorruption.Plus,theywon’ttrytopushtheir

politicsorlinethedashboardwithincense.Allofthishappensbehindthe

scenes,betweenobjects,andpoweredbyanautonomousapplication.The

drivershavecreatedablockchaincooperativeasdescribedintheprevious

chapterandtheyreceivenearlyallthewealththeycreate.Theusers—Melissa

andJohn—experienceonlytheconvenience,withnoneofthehassle.What’snot

tolove?

WheretheInternetreducedthecostsofsearchandcoordination,adigital

currencylikebitcoinontheblockchainwillenableustocutthecostsof

bargaining,contracting,policing,andenforcingthesecontracts.We’llbeableto

negotiatethebestdealandgetthepromiseddeliveryfromanyotherentitythat

willacceptbitcoin,includingadriverlesstaxi.HowwilltheUbersoftheworld

compete?

Butthescenariodoesn’tstopthere.Intelligencedesignedintothecity’s

infrastructurewillmovetrafficalong(variablelanedirection,variablepricing,

automatedtrafficsignalmanagementbasedontrafficflow),furtherreducing

wastedenergyandcosts.Theblockchaincouldsupportsafetycontrols,bothon

thevehicles(driveranddriverless)and/orontheinfrastructure,suchas

proximitywarningsandautomatedbraking,aswellasantitheftorpreventionof

unqualifiedorinebriateddriversfromtakingthewheel.Inaddition,citieswill

usethesensorstohelpmanagethetransportationinfrastructure,includingasset

managementofinfrastructureandfleets,monitoringraillineandpavement

conditions,generatingmaintenanceplansandbudgets,anddispatchingrepair

crewswhennecessary.

What’strulypowerful,thesystemsworktogether—intelligentvehicles

operatingonanintelligentinfrastructure.Whiletherewillstillbebusinessfor

driversofsharedvehicles,autonomousvehicleswillbeabletooperatesafelyon

citystreetswiththeirbuilt-innavigationandsafetysystems,ofteninteracting

withtheintelligentinfrastructuretofindandpayforanacceleratedlane,or

parking,ortosearchforandfindapreferredroute.Thereadyavailability,

affordability,andreliabilityoftheautonomousvehicleswillsignificantlyreduce

thenumberofprivatevehiclesthat,likethecommercialrealestateexample

above,areoftenjustparkedwaitingandunused.

Anditwon’tjustbetechnologyorcarcompaniesthatwillmakethishappen.

Whileallofthiscould,intheory,bedeveloped,owned,operated,andmanaged

byasinglecivictransportationauthority,thatislikelynottobethepathforward.

SUberismorelikelytoevolveandinnovateasanopenandsharedtransportation

platform,withvariousapplicationsdevelopedandintroducedbylocal

entrepreneurs,communitygroups,government,andothersineitheraprofit-

making(throughrevenueearnedonafleetofdriverlessvans),sharedco-op(a

neighborhoodgroupinvestsintenvehiclestobereservedandsharedusingthe

SUberapp),publicservice(maintainingandoperatingatrainorexpressbuses

onhigh-demandroutes),orsocialenterprise(not-for-profitsinvestinginSUber

“points,”whichtheirclientscanaccesswhentheyneedtransportation).

Thismayemergefirstinjurisdictionswithrelativelyadvanced

infrastructure,alreadyseparatetransportationcorridors(rail,road,bike,

pedestrian),significanttransportationissues(trafficcongestion),anda

populationwithalongtraditionofobeyingtrafficrules.Itmayalsobeginin

“greenfield”citydevelopmentsincooperationwithtechnologycompaniesand

carcompanieslookingfortestbedsfortheirapplications.Anyscenario

involvingdriverlessvehicleswouldbelesssuccessful,evenhighlydangerous,

whenotherroaduserscannotbeisolated(onseparatecorridors),orpredicted

(animalsontheroad),orcontrolled(distractedpedestrians).

TheSUberscenarioisincreasinglyfeasible.Suchapplicationswilllikely

emergeinthenextfewyearsandcometosolveourtransportationneedsoverthe

longterm.Alreadytoday,localtaxiandlimousinecommissionsarebattling

Uberinmanycities.Citygovernmentsarestrugglingtobalanceconsumerdesire

foraffordableoptionswithpublicsafetyandtaxilicensing,evenasthenew

modelsareseeminglyinevitable.Whynotlookwherethetransportationsectoris

goinganddesignsolutionsthatbestmeetthecity’sneeds,asChicagohasdone

inourhypotheticalSUberscenario?

HACKINGYOURFUTUREFORAWORLDOFSMARTTHINGS

We’veseenthroughoutthischaptersomemind-bogglingopportunitiesin

virtuallyallaspectsofourlives,including—perhapsespecially—manyareas

barelytouchedbythefirstwaveofthedigitalrevolution.Atthesametime,these

opportunitiesthreatenexistingbusinessesandwaysofdoingbusiness.

KeyIssues:Whatshouldyouasamanagerbedoingonbothsidesofthis

equation—torealizenewopportunities,whileminimizingthreats?Whether

you’reamanagerinthepublic,private,orsocialsector,doyouhaveun-or

underutilizedphysicalassetsthatcanbetappedforgreatervalue?Areyou

realizingthegreatestpossibleefficienciesandopportunitiestodevelopproducts

andtechnologiesfortheIoTitself?Arenewentrantsintothiseconomytaking

yourcustomersandreducingyourrevenuesthroughinnovativenewapp-based

businessmodelsthatyoushouldbeinstallingfirst?

NewValue:Whatareyourphysicalassetsandhowcanyouenhancethemto

delivergreatervaluetoyourorganizationorcommunity?Doyouhavephysical

spaces,machines,inventory,orotherassetsthatyoucouldtag,monitor,and

animateaspartofanautonomousnetworkwhereyouestablishtheoperating

parameterstodriveoutcostsoraddvalue?Couldyouembed,upgrade,and

programsensorsaspartofalargernetworkforgreaterfunctionalityandvalue?

CouldyougleannewinformationfromanIoTnetworktoimproveyour

planningandanalysisforthefuture?

NewBusinessModels:Whatopportunitiesexistfornewproductsand

servicesbasedonthenewfunctionalityanddatayoucouldgatherthroughyour

network?Couldyourinformationandassetsearnrevenuebecauseoftheirvalue

toothers,forexample,rentingoutthatexpensivepieceofequipmentwhen

you’renotusingit?Thinkingaboutthevalueofinformationisnotnew

(rememberSabreandAmericanAirlines?),butstilloverlooked.

Opportunities:Couldyoulinkyournetworkupwithothersforevengreater

value,perhapsaspartofanend-to-endsupplychainordistributionandsales

channel?Asanindustry,aretheresharedprocessesandfunctionsthatcouldbe

automatedbyutilizingtheblockchain?Areyouenablingthisinteroperabilityby

usingtechnologybuiltonopenstandardsandvettedthroughinternational

collaboration?

Threats:WhatlinesofbusinesswillnewentrantsattackwiththeirnewIoT-

basedbusinessmodelstoservemarketsthatyoucurrentlyserve?Forexample,

ratherthanaone-timesaleofavehicle,consumergood,orpieceofspecialized

equipment,isthereongoingvalueforyouandyourclientsinanewservice

modelbuiltuponyourongoingconnectiontothatequipment?Canyoucapitalize

uponyourexistingexpertise,resources,infrastructure,andcustomerloyaltyto

designnewIoT-basedbusinessmodelsthatdecreasethe“space”and,therefore,

thelikelihoodofentryofadisruptivenewplayer?

BusinessCase:Whatarethecostsandbenefitsoftheseopportunities?

Wheredoestherealvalueexistforyourorganization?Areyousolvinganactual

businessproblemorneedorjustleadingwiththetechnology?Howabout

developingaproofofconceptwithaleadingclient?

StrategicPlan:AccordingtoMcKinsey,“executiveswillneedtodealwith

threesetsofchallenges:organizationalmisalignment,technological

interoperabilityandanalyticshurdles,andheightenedcybersecurityrisks.”

We

addafourthmajorchallengetothislist—buildinginprivacyandanincentive

plan,includingappropriatesafeguards,fromthebeginning.HowwillITand

businessfunctionshavetoadapttotheIoT?Whichpartsoftheorganizationand

businessleadersshouldyouinvolve?

CHAPTER7



SOLVINGTHEPROSPERITYPARADOX:

ECONOMICINCLUSIONAND

ENTREPRENEURSHIP

APIGISNOTAPIGGYBANK

hePacificcoastofNicaraguaisoneofthemostbeautifullandscapesinthe

Americas,whereverdantgreenforestmeetsendlessbluewaters.Itsrolling

hillsandstunningbeachesmakeitatopdestinationforbackpackers,sunbathers,

andecotouristsalike.Nicaraguaisalsooneofthepoorestandleastdeveloped

countriesintheregion.Sixtypercentofthepopulationlivesbelowthepoverty

line.Thosenotemployedinitstourismindustrysurviveonnear-subsistence-

levelagricultureandfishing.Nicaraguahasthesecond-lowestnominalgross

domesticproductintheAmericas,with10percentofitsentireGDPfrom

remittances—moneyearnedoverseasandrepatriatedbytheNicaraguan

diaspora.NineteenpercentofNicaraguanshaveaformalbankaccount,butonly

14percentareabletoborrowandonly8percenthaveformalsavings.

Yet93

percenthaveamobilephonesubscription,usuallyintheformofprepaidaccess.

ThatistherealitythatJoyceKimfacedwhenshetookherteamdownto

Nicaragua.KimistheexecutivedirectoroftheStellarDevelopmentFoundation,

anot-for-profitblockchaintechnologyorganization(nottobeconfusedwith

Stellar,thelargearchitectureandconstructionfirm).ANicaraguanmicrofinance

operationwantedtolearnmoreaboutStellar’sfinancialplatform.Thewoefully

underdevelopedbankingindustryinNicaraguakeepsmostpeopleinan

inescapablecycleofpovertyandexacerbatestheplightofwould-be

entrepreneurs.Theystruggletostartnewbusinesses,registertitlestotheirland

andotherassets,andresolveoutstandingclaimsfromtheSandinista

government’smasslandexpropriationinthe1980s.

Stellar’splatformwould

enableNicaraguanstotransfer,save,invest,borrow,andlendmoney.

Kimwasbothimpressedandsurprisedbythelocalfocusonmicrocredit.

Sheunderstoodthataccesstocreditwasparamounttoeconomicinclusionbut

believedthatsavings,theabilitytostorevaluereliablyandsecurely,wasa

prerequisiteforalmostallotherfinancialservices.WhenKimaskedabout

savings,shewastold,“Oh,savingsisnotaproblemaroundhere.Peoplehave

pigs.”

Livestockmakesupthevastmajorityoffarmers’networthinmanyagrarian

economiesbecausefinancialservicesarenotwidelyavailableandindividuals

haveatenuousrighttotheirland.InNicaraguathatmeanspeopleownpigs,and

lotsofthem.Kimwassurprisedatfirst,butquicklysawtheage-oldlogictoit.

“Youwalkoutofameeting,andyoulookaroundandyouseepigsare

everywhere.”

Livestockhaslongbeenanaccepted,relativelyusefulformof

savings.Forthoseexcludedfromthedigitaleconomy,animalsareaboutas

liquidanassetasyoucanown,evenmoresoiftheyproducemilk,andtheypay

dividendsinpiglets,eggs,lambs,calves,andsometimescheese.

Prosperityisarelativeconcept.InKenya,Masaitribesmenwhoownfourto

fivehundredheadofgoatsareconsideredprosperous,buttheirlivescanbe

rough,brutish,andshort.Livestock-basedwealthis“highlylocalized,sothat

youcan’tactuallytransactwithanybodyunlessthey’rerightthereinfrontof

you,”Kimsaid.“Yourunthehugeriskswithyouranimalsrunningawayor

gettingsickorsomeblightcomingthatcouldactuallywipeoutallofyour

savings.”

Creditwasaneventoughernuttocrackthansavings.Kimgottoknowa

localNicaraguanfisherman,amemberofacooperative,whoexplainedthatno

onefishermaneverhasaccesstoenoughcredittooutfitanentirerig.According

toKim,“theyformfishermencrewswhereonepersonwillgetaloanforthenet,

somebodyelsewillgetaloanforthebait,somebodyelsegetsaloanforthe

boat,somebodyelsealoanforthemotor,andthentheycometogetherandthey

formacrew.”Noonepersonisabletofloathisorherownventure(nopun

intended)becauseaccesstocreditissotight.Themodelworks,butitinvolvesas

manymiddlemenastherearefishermen.

ThelifelongfinancialstruggleoftheNicaraguanfishermenandfarmersis

thestoryofmostunbankedpeople,aroundtwobillionadultsintheworldtoday.

Whattheylack—astoreofvaluethatwon’tgetmadcowdiseaseordieofold

age,orapaymentmechanismthatextendsbeyondthevillage—wetakefor

granted.

Financialinclusionisaprerequisiteforeconomicinclusion.Itsrepercussions

extendbeyondfinance.Kimsaid,“Idon’tconsiderfinancialaccessandfinancial

inclusiontobetheendgoal.It’sapathweallhavetowalktogetbetter

education,betterhealthcare,equalwomen’srights,andeconomic

development.”

Inshort,financialinclusionisafundamentalright.

Thischapterlooksatopportunitiesformobileandfinancialserviceproviders

andotherbusinessestouseblockchainstounleashtheeconomicpotentialatthe

bottomofthepyramid.We’retalkingbillionsofnewcustomers,entrepreneurs,

andownersofassets,onthegroundandreadytobedeployed.Remember,

blockchaintransactionscanbetiny,fractionsofpennies,andcostverylittleto

complete.Anyonewiththesmallestofassets—say,atalentforembroideryor

music,sparewaterpails,achickenthatlayseggs,amobilephonethatrecords

data,audio,andimages—couldexchangevalue.Thenewplatformalso

eliminatesthepoint-of-accessbarrier.IfyoucanaccesstheInternetonamobile

device,thenyoucanaccessassetswithnoformstofilloutandverylittle

literacy.Theseareseeminglysmallbutincrediblyimportantbreakthroughs.If

wedothisright,blockchaintechnologycouldunleashthebiggestuntappedpool

ofhumancapitalinhistory,bringingbillionsofengaged,prospering

entrepreneursintotheglobaleconomy.

THENEWPROSPERITYPARADOX

Forthefirsttimeinmodernhistory,theglobaleconomyisgrowingbutfeware

benefiting.Ononehand,thedigitalageisbringinglimitlesspossibilitiesfor

innovationandeconomicprogress.Corporateprofitsareballooning.Onthe

otherhand,prosperityhasstalled.Throughoutmodernhistory,individualsand

familiesatthe51stpercentilewereontherise.Despitedepressionsand

upheavals,prosperityfortheseindividuals,andforsocietyasawhole,steadily

increased.Thisisnolongerthecase.Standardsoflivingareevendecliningin

thedevelopedworld.MedianwagesarestagnatinginOECDcountries.And,

accordingtotheInternationalLabourOrganization,youthunemploymentin

mostoftheworldisstuckatabout20percent.“Youngpeople[are]nearlythree

timesaslikelyasadultstobeunemployed,”theILOreported.

Inmany

developingnations,thenumbersaresignificantlyhigher.Suchunemploymentis

corrosivetoallsocieties,nomatterwhattheirlevelofdevelopment.Most

citizenswanttocontributetotheircommunity.Anyonewhohasbeenjobless

knowshowiterodesself-esteemandwell-being.Thosewithpowerandwealth

aregettingahead,andthosewithoutarefallingbehind.

Thisnewprosperityparadox,nottobeconfusedwiththeintergenerational

“ParadoxofProsperity”coinedbyeconomistssuchasGilbertMorris,has

befuddledeverypolicymakerintheWesternworld.Oneofthebest-selling

businessbooksof2014,CapitalintheTwenty-FirstCenturybyThomasPiketty,

becamethe#1bestsellerontheNewYorkTimeshardcovernonfictionlistin

2014.Atourdeforceofacademicscholarship,Capitalexplainswhyinequality

isacceleratingandwilllikelycontinuetodosoaslongasthereturnoncapital

exceedslong-termeconomicgrowth.Therichhavegottenricherbecausetheir

moneymadethemmoremoneythantheirworkdid.Hence,theproliferationof

newmillionairesandbillionaires.Buthissolutionforhowtostemgrowing

socialinequality,byimposingawealthtaxontheoneswhoownmostofthe

world’swealth,wassomewhatlessinspiring,ifonlybecausewe’veheardit

before.

Indeed,foraslongascapitalismhasbeentheprimarymodeof

production,thedebateabouthowtosharethefruitsmoreequallyhasnotmoved

muchbeyondtheredistributionofwealth,usuallythroughtaxationoftherich

andtheprovisionofpublicservicestothepoor.Advocatesofourcurrent

economicmodelpointtothehundredsofmillionsofpeopleinthedeveloping

world(mostlyinAsia)whohavebeenliftedoutofabjectpoverty,butoften

overlooktheasymmetricbenefitsconferredtotheverywealthyandthe

wideningchasmbetweenthesuperrichandtherestofthepopulationinthose

samecountries.Today,theglobal1percentownshalftheworld’swealthwhile

3.5billionpeopleearnfewerthantwodollarsaday.

Defendersofthestatusquoarequicktopointoutthatmostoftheworld’s

superrichgotrichbycreatingcompanies,notthroughinheritance.However,

behindthesuccessesofafewaresomeverytroublingstatistics.Therateofnew

businessformationisdown.IntheUnitedStates,theshareoftotalfirmsthatare

youngerthanoneyearoldfellbynearlyhalfbetween1978and2011,from15

percentto8percent.

Themillennialgeneration,oftcharacterizedas

entrepreneurialrisktakers,isdoinglittletobuckthetrendandmaybe

contributingtoit.ArecentanalysisofFederalReservedatafoundthatonly3.6

percentofAmericanhouseholdsheadedbysomeoneunderthirtyheldastakein

aprivatecompany,downfrom10.6percentin1989.

Inthedevelopingworld,thedigitalrevolutionhasdonelittletoclearthe

entrepreneurialpathofredtapeandcorruption.Whereitcostsonly3.4percent

ofper-capitaincometostartabusinessinOECDcountries,itcosts31.4percent

inLatinAmericaandashocking56.2percentinsub-SaharanAfrica.InBrazil,

anentrepreneurhastowaitalmost103daystoincorporatehiscompanyversus4

daysintheUnitedStatesandhalfadayinNewZealand.

Exasperatedby

governmentbloatandinefficiency,manywould-bedeveloping-world

entrepreneursinsteadchoosetooperateintheso-calledinformaleconomy.

“ThereareabunchofthingstakenforgrantedintheWest.Propertyrecordsare

fine-tuned,forexample.IntheGlobalSouth,entrepreneurswouldratherthe

governmentnotknowtheyexist.Weneedtomakeidentityaprofitable

proposition,”saidHernandodeSoto.Fornow,stayingintheshadowsfreesthese

entrepreneursfrommeddlesomeandcorruptofficials,butitalsoprofoundly

limitstheirabilitytogrowtheirbusiness,limitsrights,andmakes“deadcapital”

ofmoneythatcouldotherwisebedeployedmoreefficiently.

Moreover,even

forthosewhooperatetheirbusinessesintheopen,lawsofmanycountriesdo

notprovideforlimitedliability.Ifyourbusinessfails,you’repersonallyonthe

hookforallliabilities.IfyoubounceabusinesscheckinmanyArabcountries,

yougostraighttojail—“donotpassgo”oranyotherinstitutionsofdueprocess

ontheway.

Okay,then,theworldhasalwayshadhavesandhave-nots.Todayfewer

peoplestarvetodeath,ordiefrommalariaorthroughviolentconflict.Fewer

peopleliveinextremepovertytodaythanin1990.

Certainemerging

economieshavebenefitedfromoutsourcingofmanufacturingandliberalization

ofeconomicpolicies—Chinabeingaprimeexampleofboth—andthemean

incomeofcitizensinmostdevelopedcountriesincreased.Onbalance,people

arebetteroffthantheyusedtobe,right?Sowhatiftherichjusthappentoown

significantlymore?Shouldn’ttheykeepwhatthey’veearnedthroughtheir

efforts?What’stheproblem?

Pikettypointedatcapitalism.Butcapitalism,asasystemfororganizingthe

economy,isnottheproblem.Infact,capitalismisagreatwaytocreatewealth

andprosperityforthosewhoknowhowtouseit.Theproblemisthatmost

peoplenevergetashotatseeingthebenefitsofthesystembecausetheRube

Goldbergmachineofmodernfinancepreventsmanyfromaccessingit.

Financialandeconomicexclusionistheproblem.Fifteenpercentofthe

populationinOECDcountrieshasnorelationshipwithafinancialinstitution,

withcountrieslikeMexicohaving73percentofthepopulationunbanked.Inthe

UnitedStates,15percentoverfifteenyearsofage,or37millionAmericans,are

unbanked.

Financialinequalityisaneconomicconditionthatcanquicklymorphintoa

socialcrisis.

In2014,theWorldEconomicForum,amultistakeholder

organizationwhosemembersincludethelargestcompaniesandmostpowerful

governmentsintheworld,arguedthatgrowinginequalityposedthesingle

biggestriskglobally,beatingoutglobalwarming,war,disease,andother

calamities.

Blockchaincouldbethesolution.Byloweringbarrierstofinancial

inclusionandenablingnewmodelsofentrepreneurship,thetonicofthemarket

couldbebroughttobearonthedreamsandideasofbillionsoftheunbanked.

ProsperityPurgatory:AnExerciseinFutility

Forcenturies,bankshavereliedonnetworkeffects.Eachsuccessivecustomer,

branch,product,dollarin,anddollaroutincreasesthevalueofthebank’s

network.However,buildingthesenetworkshascomeatacost.Specifically,the

costofacquiringaprofit-turningcustomerhasonlyincreased.Ifaprospect’s

moneywon’tearnitskeep,thebankwon’tbeinterestedinkeepingit.Thus,

bankshavelittleeconomicincentivetowincustomersinthebottomhalfofthe

pyramid.AccordingtoTylerWinklevoss,banksdon’tservemostoftheworld

andhavenoexistingplanstoservethem.However,newtechnologycould

removethatstep.Hesaid,“AlotofAfricancountriesleapfroggedthe

infrastructureoflandlinetelecomswithcellular.Theyskippedthatstep.

Blockchainwillhavethegreatestimpactinareaswherethepaymentnetworks

don’texistorareverypoor.”

Blockchainwillpushmanynascentinitiatives,

suchasmobile-moneyserviceproviderslikeM-PesainKenya,ownedby

Safaricom,andmicrocreditoutfitsglobally,intohighgearbymakingthemopen,

global,andlightningfast.

Abankisthemostcommonfinancialinstitution,andsowewilluseitasan

examplehere.Howdoyouopenabankaccount?Ifyouliveinthedeveloping

worldtoday,youwilllikelyhavetovisitthebranchinperson.InNicaragua,

thereareonly7bankbranchesper100,000peoplecomparedwith34per

100,000intheUnitedStates.Nicaragualookswellbankedcomparedwithmany

countriesinAfrica,wheretherecanbefewerthan2branchesper100,000

people.

Soyouwillprobablyhavetotravelagooddistancetofindabank.You

willalsoneedtobringagovernment-issuedidentitycard,butthatwillbejustas

difficulttocomebyifyoudon’talreadyhaveone.

Inthedevelopedworld—say,theUnitedStates—youneedtomeetcertain

requirements.Whiletheserequirementsvaryfrombanktobankandstateto

state,youtypicallyneedtodepositandmaintaina$100to$500minimum

balance.Youalsoneedtoproveyouridentity.Banksthatdobusinessinthe

Statesmustcomplywithstringent“knowyourcustomer,”“anti–money

laundering,”and“anti–terrorismfinancing”regulations.

Andsotheymustdo

morecomprehensivebackgroundchecksonapplicantsbeforegrantingtheman

account.Ultimately,thebankislessinterestedinevaluatingyourcharacterthan

itisincomplyingwithregulatoryagencies.Thatmeansalaundrylistof

requirements.First,youneedaSocialSecuritycard.Don’thaveone?That’s

usuallyenoughtogetrejected.HowaboutaphotoIDlikeadriver’slicenseor

passport?Don’thaveone?You’renotopeningabankaccount.Let’ssayyou

havebothaSocialSecuritycardandphotoID.Thebank,justtobesafe,asksfor

arecentutilitybillasproofofpermanentresidenceorsomeproofofaprevious

bankaccount.Ifyouhappentobenewtotown,orstayingwithfamily,orfrom

anentirelyunbankedregionoftheworld,you’dlikelyfailsomeofthesetests.

Thebankdoesn’twantyouasacustomerunlessitcanconfirmyouridentity

basedonvariouspaperedcredentials.It’snotinterestedinknowingyouasa

well-roundedperson.It’sinterestedinknowingyouasasetofcheckedboxes.

Previousattemptstostreamlinethisprocessforimmigrantsandthepoor,suchas

theNewYorkschemetoallowpeopletousetheircityIDcards,havefailed.

TheProsperityPassport:AnExerciseinUtility

Fortunatelyfortheunbanked,blockchaintechnologyisengenderinganewform

offinancialidentity—onenotdependentuponone’srelationtoabankbutrooted

inone’sownreputation.Inthisnewparadigm,being“banked”inthetraditional

senseisnolongeraprerequisite.InsteadofpassingthetraditionalIDtests,

individualscancreateapersistentdigitalIDandverifiablereputationanddeploy

it,inwholeorinpart,indifferentrelationshipsandtransactions.Theblockchain

endowsthisdigitalIDwithtrustandaccesstofinancialservices.Thiscapability

isunprecedentedatamassivescale.JosephLubinofConsenSyssaid,“Weall

havereputation.Itjustisn’teasytouseassocialandeconomicsystemsare

currentlyconstructed.Mostofitisetherealandephemeral.Inthebestcase,itis

fragmentedandyouhavetopresentshallowdocumentationofitanewforevery

venturethatrequiresit.Intheworstcase,billionsofpeopledon’thaveawayof

presentingreputationtoanybodybuttheirimmediatesocialcircle.”

Itmightas

wellbeapigoracow.However,withthebasicbuildingblocks,peoplecan

constructdigitalidentitiesthatarenotfragmentedoretherealbutuniversaland

standardized,withrobustattestationsofaspectsofthemselvesandtheir

interactions.TheycansharethesedigitalIDsgranularly—thatis,shareonlyvery

specificinformationabouttheiridentity—tofacilitatemoreinteractionsthatwill

likelyleadtotheirownpersonaleconomicgrowthandprosperity.DavidBirch,a

cryptographerandblockchaintheorist,summeditup:“Identityisthenew

money.”

Considerthepossibilities:theunderbankedoftheworldcanenfranchise

themselvesastheyinteractwithmicrolendingoutfits.Potentialvendorsor

lenderscantracktheirusageandrepaymentoftinyloans,previouslyunfeasible,

ontheblockchainratherthanrelyonsomecreditscore.“Onceapreviously

unbankedpersonpaysbackamicroloan,theyareontheirwaytosecuringmore

andlargerloanstobuildtheirbusinesses,”

saidLubin.Thisbehavior,when

repeated,addstothereputationscoreoftheborrower.Combinedwithaglobal,

frictionlesspaymentplatform,individualsandsmallbusinessownerscandothe

previouslyimpossible:payaremotevendorformerchandiseorservices,thereby

advancingtheirprospectsintheglobaleconomy.JoyceKimmused,“Whatifwe

couldcreateacreditscoreforwomenbasedontheirhouseholdhistory?”

Economicandfinancialfaultlinesoftenrunalongsidegenderlines,makingthis

technologyaboonfortheworld’sdisenfranchisedwomen.Referringtothe

globalpoor,deSotosaid,“It’snotthattheydon’twanttocomeintotheglobal

economy.It’sthatthestandardsandinformationtobringthemintothesystem

arenotinplace.Blockchainisterrificbecauseitgivesusacommonplatformto

bringpeopletogether.”

Whatcouldthispersistentreputationmeanforglobalentrepreneurship?If

youhaveareliable,unique,androbustidentity,andyou’redeemedtrustworthy,

counterpartieswillfeelmorecomfortableprovidingyouwithaccesstovalue.

Thisisnotredistributionofwealthbutawiderdistributionofopportunity.Haluk

Kulin,CEOofPersonalBlackBox,said,“Thebiggestredistributionthatisabout

tohappenisnotaredistributionofwealthbutaredistributionofvalue.Wealthis

howmuchmoneyyouhave.Valueiswhereyouparticipate.”

Blockchaincan

enableeverypersontohaveauniqueandverifiablereputation-basedidentity

thatallowsthemtoparticipateequallyintheeconomy.Theimplicationsofthis

equalityareprofound.Lubinimaginesafuturewherethe“unbankedand

underbankedwillbecomeincreasinglyenfranchisedasmicrolendingservices

willenableinvestorsacrosstheglobetoconstructdiverseportfoliosofmany

microloansofwhichtheusageandrepaymentcanbetrackedinfulldetailonthe

blockchain,usingBalanc3’s[aConsenSysportfoliocompany]triple-entry

accountingsystem,forinstance.”

Inthisnewfuture,whenpeoplerepay

microloans,theyareontheirwaytosecuringmoreandlargerloanstobuildtheir

businesses.

ROADMAPTOPROSPERITY

Financialidentityisthegenesisforawidearrayoffinancialandeconomic

opportunitypreviouslyunattainableformorethantwobillionoftheworld’s

population.Blockchaintechnologyenablespeoplefromallwalksoflifetomap

outtheirownprosperity.Imaginethat,awealthofone’sown—forlarge

numbers,ultimatelybillionsofpeople.

ToolsofAbundance:Themostbasicrequirementstoparticipateinan

economyaretoolslikeamobilephoneandsomekindofInternetaccess,the

portalthroughwhichpeopleinteractwithdifferentvaluesystems.Dr.Balaji

Srinivasan,managingpartneratAndreessenHorowitzandalectureratStanford

University,said,“IfyoucanaccesstheInternetonamobilephone,suddenly

you’reabletoaccessalltheseotherthings.Youcanaccessabankoratleastthe

mechanismsforit.”

Blockchaintechnologycreatesawholenewsetof

businessmodelspreviouslyunimaginablethatempowerindividualsaseconomic

agents.

PersistentIdentity:Youcanuseandportidentityintodifferentnetworksto

establishreputationinafinancialtransactionortoplugintodifferentsocial

networks.Suddenly,apignolongerhastobethefamilypiggybank.New

paymentrailsandmeanstostorevalueandtransactwithcounterpartieswill

opennewfrontiers.Indeed,thisloweringofbarrierstofinancialinclusionwill

makeiteasierthaneverforentrepreneursinthedevelopedanddevelopingworld

aliketobuildbusinesses.Thisincludeseverythingfromturningonapayment

mechanism,tohavingareliablestoreofvalue,tousingblockchainsoftwareto

managefinancialstatements.

DemocratizedEntrepreneurship:Undertherightconditions,entrepreneurs

aretheenginesofeconomicgrowthinsociety.Theybringfreshthinkingtothe

marketplaceandfuelthecreativedestructionthatmakesmarketeconomies

prosper.Blockchaintechnologybestowsindividualsandsmallcompanies

anywhereintheworldwithmanyofthesamecapabilitiesoflarger

organizations.Blockchain-basedledgersandsmartcontractslowerbarriersto

startingacompany,expediteincorporation,andcutredtapeparticularlyinthe

developingworld,whereittakesthreetimeslongertoincorporateandcostsfive

timesasmuch.

Blockchainscanautomate,streamline,andotherwisedramaticallyimprove

thethreecomponentsofbusinessbuilding:formation,fund-raising,andsales.

Formationcostswilldropsignificantly,asblockchainisatrusted,knownwayto

incorporateabusiness.Youcanseeownershipandmaintainrecordseasily,

especiallyhelpfulinareaswheretheruleoflawisabsent.Financingacompany

iseasierasyoucanaccessequityanddebtcapitalonaglobalscale,andifyou’re

usingacommondenominator—likebitcoin—youneednotworryabout

exchangeratesandconversionrates.Salesbecomeafunctionofaccessing

anyonewithaconnecteddevice.Buyersdon’tneedacreditcard,localcurrency,

orbankaccount.

Throughsecureandimmutableledgers,entrepreneurswillbeabletoregister

theirbusinessandtitleofcorporateassets;manageinventory,payables,and

receivables;andleverageotherfinancialmetricsthroughtriple-entryaccounting

softwareandotherblockchain-basedapplications,reducingtheneedfor

auditors,taxlawyers,andothervendorswhoweighonsmallbusinesses.

Regulatorsmightcutsmallbusinessesabreakforoptingintoatriple-entry

accountingscheme.Thatmeansmoretothebottomlineandlesswastedtime.

Asthecompanygrows,reconcilingcorporateactionsanddocumentationwill

becomelesscomplex.Throughsmartcontracts,anentrepreneurcouldautomate

manyaspectsofacompany’soperations:purchaseorders,payroll,intereston

debt,andfinancialauditsinrealtime.Twonewmodelsforindividual

entrepreneurshipwillgaintraction:

METERINGEXCESSCAPACITY.Fromthecentralizedsharingeconomytothe

distributedmeteringeconomy,individualswillbeabletoloanouttheirspare

beds,wheelbarrows,oxen,andothertangibleandintangibleassetstopeersina

networkbasedonreputationscores.Blockchainenablespreviouslyimpossible

revenuestreamssuchasmeteringWi-Fi,electricitygeneratedfromroof-installed

solarpanels,Netflixsubscriptions,latentcomputingpowerinyourphone,and

otherhouseholdappliances—allthroughmicropaymentsandsmartcontracts.

Theblockchainbecomesanewutilityforindividualstocreatevalueandearn

incomeinnontraditionalways.

MICROMONETIZINGDATA.Parentswhoworkinthehomeandfamily

caregiversofallkindswholabortirelesslyoveryoungchildrenandaging

parentscanatlastmonetizetheireffortsandberecognizedforthevaluethey

delivereveryhouroftheday.Thisisnotadeveloped-worldopportunity

exclusively.Bigcompaniesarelookingforwaystomarkettopeopleinthe

globalSouthbutoftenlacktherightdatatomakebusinessdecisions.

Contractingandlicensingpersonaldatacouldbeagreatopportunitytoadda

newrevenuestreamforayoungentrepreneurwhileheislaunchinghisnew

blockchainIPO.Today,hugedigitalconglomerateslikeFacebookandGoogle

harvestpetabytesofdataaboutbillionsofpeople.WeenterintoaFaustian

bargainwherewegiveupdatainexchangeforcoolservices,butweloseprivacy

anddataintegrityintheprocess.Blockchainturnsconsumersintoprosumers.

Nikemightliketoknowwhatyouateforbreakfast,howoftenyougoforarun,

andwhetheryouarethinkingofbuyingnewworkoutgear.Whynotcontractthat

datainexchangeforNikepointsorrealmoney?Let’sgoonestepfurther:

Insurancecompaniesaresearchingforthebestdatatomakeactuarial

calculations.Yourowndata—howmuchyouexercise,ifyousmoke,whatyou

eat—areveryvaluabletothem.Enterintoalicensingagreementwhereevery

timetheyuseyourdatatomakeanactuarialcalculationandpriceanewproduct,

yougetamicropayment.

DistributedOwnershipandInvestment

We’removingintoaperiodofhumanhistorywherebyverylargenumbersof

peoplecanbecomeownersofwealththroughdistributedledgertechnology.

Enablingaccesstotheworld’sfinancialmarketsandthereforetheuniverseof

investmentopportunities,fromconventionalinvestmentstoparticipationinmass

collaborativeventures,microlendingschemes,blockchainIPOs,andreputation-

basedmicrolending,willopenaccesstocapital.Already,crowdfundingis

changingthefaceoffinance.In2012,nonblockchaincrowdfundingcampaigns

raised$2.7billionaroundtheworld,an80percentincreaseovertheyearbefore.

Withdirectpeer-to-peercrowdsourcedblockchainfinancings,thesenumbersare

poisedtogrowmanifold.Individualscancontributesmallamountsofmoney

throughcrowdfundingcampaigns.Imagineacampaignthatengagesamillion

peopleeachgivingadollar.Callitdistributedownership.Notmeaningful,you

say?Augur,thepredictionmarketplatform,raisedmillionsofdollarsinsmall

incrementsfromthousandsaroundtheglobe.Therangeofpossibilitiesisvast.

BlockchainIPOsnotonlycanimprovetheefficacyandefficiencyofraising

money,loweringthecostfortheissuer,theycanalsobebroadlyinclusive,

allowingpreviouslyunimaginablegroupsofburgeoninginvestorstoparticipate.

Todate,therangeofproposalstochangeincomeandwealthdisparityhasnot

reachedbeyondhighertaxesforthewealthyontheoneend,or,atitsmost

extreme,outrightexpropriationbythestate.Insteadofredistributingand

expropriatingwealth,let’simaginehowblockchaincancreateopportunitiesto

sharemoreequallyinthewealthcreatedbysociety.

REMITTANCES:THESTORYOFANALIEDOMINGO

AnalieDomingo

hasbeenworkingasanannyandhousekeeperfortwenty-five

years.Oneofmorethan200,000Filipino-bornpeoplelivinginToronto,

her

storyisfairlytypical:SheleftthePhilippinesasayoungwomantosettlein

Canadawithnosavings,noformaleducation,andverylittleknowledgeofher

adoptivecountry.Analiehasworkedveryhardandhascarvedoutalifefor

herselfandherfamily.Tenyearsago,sheusedhersavingstoputadown

paymentonahouse,aremarkablefeatasshehadbeendutifullysendingmoney

toherfamilyinthePhilippinesforthepreviousthreehundredmonths.Analie

senthomesomuchmoneythathermother,nowinherseventies,wasableto

purchaseahomeofherowninManila.

Analiegraciouslyagreedtoletusjoinheronpaydaytodocumenther

experience.OnFridayafternoon,Analiegotherpaycheck,handwrittenbyher

employer,andwalkedittothelocalbank.Thistookfifteenminutes;twenty

minutesifyouincludethelineupattheteller.Aftershedepositedit,she

withdrew$200Canadian.Coldhardcashinhand,shewalkedablocktocatcha

localbus.Insteadofheadingtowardherhome,shewenttwomilesinthe

oppositedirectionandgotdroppedoffatwhatcanonlybedescribedasabad

neighborhood.Shewalkedforanotherfourblocksandfinallyarrivedatthe

“financialinstitution”fromwhichshewouldsendthemoney:aniRemitcounter

atthebottomofahousingblockinToronto’sSt.JamesTown—oneofthe

poorestandmostnotoriouslydangerousneighborhoodsinCanada.Because

manypeoplewhouseiRemit’sservicesareunbanked,thecompanyhasbegun

offeringotherfinancialservices,suchascheckcashing.Analiefilledoutapaper

form,asshehasdonehundredsoftimesbefore,andhandedoverherhard-

earnedmoney.Fora$200wire,Analiepaidaflatfeeof$10.Onthereceiving

end,herseventy-year-oldmotherenduredasimilarlytaxing(andequally

ridiculous)trektoreceivethemoney.Ofcourse,shehadtowaitthreetofour

daysbeforegoingtothebank,theaveragetimethesepaymentstaketoget

processed.Analiewalkedbacktothebusstop,boardedthebus,asubway,and

anotherbus,andeventually,onehourlater,reachedherhome.

Thecostofsendingthatremittance,$10,isequalto5percentofthetotal

value.Inaddition,thereistypicallyaspreadontheexchangerateofaround1to

2percent.Ataround7percentthisisaslightdiscounttotheinternational

averageof7.68percent.

Thattheyareboth“banked”andstillhavetogo

throughthisprocessmakesthewholefarcicalroutinemoreegregious.Thehard

costfailstocapturetheall-incost.Forexample,thetimevalueofthetwohours

Analiewasteddoingthisisequaltoanother$40,basedonherwages.Moreover,

shehadtoleaveworkearlybecauseshefeelsunsafegoingtotheneighborhood

whenit’sdark.Forhermother,aseptuagenarianlivinginManila,thephysical

tollonherbodyofmakingthejourneytopickupthemoneyisequally

significant.Thepurchasingpowerofthe$10Analieforwenttomakethe

transactionhappeniscertainlymaterialtoher,butfarmoreforhermother.

WhereasinCanada$10isthecostofamealandbusfare,inManilaitcouldbuy

foodforaweek.Overherlifetime,Analiehaspaidthousandsofdollarsto

intermediariessuchasWesternUniontosendmoneyhome.Eachmonthlyfee

contributestoaglobalhoneypotof$38billioninfeespaidannuallyon

remittances.

Remittancesoffundssentbacktotheirhomelandsbypeoplelivingindistant

locationsconnectdiasporasglobally.Diasporasareglobalcommunitiesformed

bypeopledispersedfromtheirancestrallandsbutwhoshareacommonculture

andstrongidentitywiththeirhomeland.

Oneofthefunctionsofmanyoftoday’sdiasporasistoaddressandhelp

solvecommon,globalproblems.Remittancesrepresentoneofthelargestflows

ofcapitaltodevelopingcountriesandcanhaveanenormouslypositiveimpact

onthequalityofthelivesofsomeoftheworld’smostvulnerablepeople.In

somecountries,remittancesareahugeandvitalcomponentoftheeconomy.In

Haiti,forexample,remittancesaccountfor20percentofGDP.ThePhilippines

receives$24billioneveryyearinremittances,or10percentofGDP.

AccordingtotheInternationalMonetaryFund,recipientsusuallyspend

remittancesonnecessities—food,clothing,medicine,andshelter,meaning

remittances“helplifthugenumbersofpeopleoutofpovertybysupportinga

higherlevelofconsumptionthanwouldotherwisebepossible.”

Remittance

flowstodevelopingnationsareestimatedtobethreetofourtimesaslargeas

foreignaidflows.

Thepositiveeffectsofremittancesonthepoorindeveloping

countriesarewellunderstood,yetdespitethisenormouseconomicinjection,

remittancecostsarestillappallinglyhigh.Insomeofthemostexpensive

corridorsbetweennations,feesonremittancescanrunnorthof20percent.

Canadaisoneofthelargestnetsendersofremittancesintheworld.In

Ontario,Canada’slargestprovincebypopulationandlargesteconomy,3.6

millionpeopleidentifyasbeingforeignbornandeveryyearbillionsofdollars

leavetheprovinceintheformofremittances.

Analie’sstoryisnoteworthy

becauseitisthenorminCanada.

ConsidertheDufferinMall,alsoinToronto.Onmostdaysthemallseesa

steadyflowoftrafficandcouldbemistakenforanyothershoppingcenterin

CanadaortheUnitedStates.ButeveryThursdayandFridayaroundfiveo’clock

intheevening,somethingentirelydifferenthappens.Paychecksinhand,

thousandsofforeign-bornCanadiansdescendonthemalltosendremittances

fromthemall’svariousbanksandforeignexchangedealerstoneedyfamily

membersintheirhomecountries.Acottageindustryofforeignexchangedealers

andWesternUnionoutpostshaspoppedupinconveniencestores,bars,and

restaurantsinthesurroundingareatodealwiththeoverflow.

Oftentimestravelingbybus,streetcar,orsubway,withchildrenintowand

exhaustedfromalongday,TorontoniansspeakingFilipino,Cantonese,Spanish,

Punjabi,Tamil,Arabic,Polish,andotherlanguagesgettothemall,andthen

standinlonglineswaitingforthechancetosendtheirhard-earnedmoneyhome.

Thesedays,mostpeoplepassthetimeontheirsmartphones,chattingover

WhatsApp,SkypingfriendsandfamilyinTorontoandabroad,playinggames,

andwatchingvideos.Moreoftenthannot,ittakesupwardsofaweekforthis

moneytoarriveatitsintendeddestination,atwhichpointsomeoneonthe

receivingendneedstogothroughasimilarlytedious,time-consumingprocess.

What’swrongwiththisscenario?Justabouteverything.Let’steaseoutthe

brightspots.Remember,mostofthepeoplewaitinginlinewereusingsmart

phones,atechnologythatispervasiveinCanadaandincreasinglyubiquitous

globally.Seventy-threepercentofCanadiansownasmartphone,andinToronto

thenumberisalmostcertainlyhigher.Thecountryhasawirelessnetwork

infrastructureamongthebestintheworld,whichmeansthatnotonlycanmost

Canadiansownasmartphone(effectivelyasupercomputer),buttheycanalso

useittoharnessthepowerofthemobileWebinwaysthatwouldhaveseemed

likesciencefictiontwodecadesago.Whydothosepeoplewaitinlinetosend

moneyviaaphysicalpointofsaleusingdecades-oldtechnologyinsteadofwhat

theyhaveattheirfingertips?DollarsarealotlessdataintensivethanHDvideo.

Infact,accordingtoSkype,videocallingconsumes500kilobitspersecond.

Sendingonebitcointakesabout500bits,orroughlyoneone-thousandththedata

consumptionofonesecondofvideoSkype!

Bydisintermediatingtraditionalthirdpartiesandradicallysimplifying

processes,blockchaincanfinallyenableinstant,frictionlesspayments,sothat

peopledon’twaitinlineforanhourormore,travelgreatdistances,orrisklife

andlimbventuringintodangerousneighborhoodsatnightjusttosendmoney.

Today,anumberofcompaniesandorganizationsareleveragingthebitcoin

protocoltolowerremittancecosts.Theirgoalistoputbillionsofdollarsintothe

handsoftheworld’spoorestpeople.Theseindustrieshavebeencontrolledbya

handfuloffirmsthathaveusedtheiruniquepositioningandlegacyinfrastructure

toproducemonopolyeconomics.Buttheytooseetheriskfromthistechnology

andthey’rescared.AccordingtoEricPiscini,wholeadsDeloitte’s

cryptocurrencygroup,companiesinthepaymentspacetoday“arereallynervous

aboutwhattheblockchainisactuallydoingtothem.WesternUnion,

MoneyGram,iRemit,andothersareverynervousaboutthedisruptiontotheir

businessmodel.”

Theyshouldbe,asthereisanemergingindustryofnewand

disruptivecompaniesthatplantotaketheirplace.

Well,Luke,MyFriend,WhatAboutYoungAnalie?

Therearetwomainobstaclestocreatingablockchain-basedpaymentnetwork

fortheworld’spoor.First,manyofthepeoplesendingthemoneygetpaidin

cashandthoseonthereceivingendliveinapredominantlycash-basedeconomy.

Second,mostpeopleinthedevelopedanddevelopingworldalikedon’thavethe

knowledgeandtoolstouseblockchaineffectively.Whilecashmayverywellgo

thewayofthedodo,untilemployersstartbeamingvaluetosmartwalletsinthe

developedworld,andtinystreetsidemerchantsinManila,Port-au-Prince,and

Lagosstartacceptingdigitalpayments,wewillstillneedhardcurrency.Western

Unionunderstandsthat,andthat’swhyitisstillveryrelevanttoday,withmore

than500,000agentsallovertheworld.

Ifyou’relookingtoexchangeyour

remittanceforcash,youroptionsarelimited.WesternUnionwouldn’tbe

effectiveifithadonlyoneagent.Itsnetworkhasallowedittomaintaina

monopolypositionontheentiremarketfordecades.Therehavebeenfewifany

companieswithaseamless,easy-to-use“killerapp”technology.Untilnow.

EnterAbra,andothercompanieslikeit.WithanamelikeAbra,onewould

expecttoseealittle“cadabra,”andthecompanydoesnotdisappoint.Abrais

buildingaglobaldigitalassetmanagementsystemonthebitcoinblockchain.Its

statedmissionistoturneverysmartphoneintoatellerthatcandispense

physicalcashtoanyothermemberofthenetwork.Wewantedtotestwhether

thissolutionimprovedAnalie’sexperience.

AnalieandhermombothdownloadedtheapptotheirAndroidsmart

phones.Analie’sbalancetostartwasinCanadiandollars.Attheclickofa

button,Analieinitiatedthetransfertohermom.Shegotit,inpesos,almost

instantly.Atthispoint,hermomhadthechoiceofkeepingpesosonherphone

asastoreofvalueandchoosingtospendthematagrowingnumberof

merchantsthatnowacceptAbraasapaymentsystem.Bycreatingapayment

mechanismandstoreofvalue,Abraeffectivelydisplacestheconventional

bankingsystem’stwomostessentialroles:paymentsandvaluestorage.This

aloneisarevolutionaryconcept,buthere’swhereitgetsreallyinteresting:Mom

wantscash.Shepaysherrent,buysherfood,andmanagesvirtuallyallother

expensesincash.ShecheckstheappandnoticestherearefourotherAbrausers

withinafour-blockradiusofher.Shemessagesthemalltoseewhowill

exchangeherdigitalpesosforphysicalpesosandatwhatprice.Thefourcome

backtoherwithdifferent“bids”fortheirservices.Onepersonwilldoitfor3

percent,anotherfor2percent,andtwomorefor1.5percent.Momdecidestogo

withthetelleroffering2percent—notbecauseit’sthecheapestbutbecausethis

tellerhasafive-starratingandhasagreedtomeetherhalfway.Theymeetand

sheswapsherAbrapesosforphysicalpesos,thetellermakeshiscommission,

andtheybothwalkawayhappy.Abratakesa25-basis-pointfeeonconversion.

Theentireprocess,frommoneyleavingTorontototheFilipinorecipient

holdingcash,takeslessthananhourandcosts25basispointsnet,inclusiveof

foreignexchangeandallothertransactioncosts.WhereaseveryWesternUnion

transactionrequiresuptosevenoreightintermediaries—correspondingbanks,

localbanks,WesternUnion,theindividualagents,andothers—theAbra

transactionrequiresonlythree:twopeersandtheAbraplatform.“Igetitnow.

That’sreallycool!”saidAnalie,ecstatically.

ForAbratoscaleglobally,itmustaddresstwocorechallenges.First,the

networkrequiresacriticalmassoftellerstomaketheserviceconvenient.

Analie’smomwon’tuseitifthenearesttelleristwentymilesaway.Abra

understandsthis,anditispresigningtellers—atlastcountmanythousandsinthe

Philippinesalone—whoarereadytotransactwhenthingsgolive.Second,the

modelworksontheassumptionthattellersandcustomerswillabidebytheir

commitmentwhentheytransferdigitalforphysicalcurrency.Thisislessofa

concern.BusinesseslikeAirbnb,LendingClub,andZipcarhavedebunkedthe

myththatindividualswillnottrustoneanother.Indeed,forAbraCEOBill

Barhydt,thestaggeringgrowthinthenumberofso-calledsharingeconomy

companiesconvincedhimthiswasn’tanissue.“Peoplearewillingtotrusteach

otherfasterthanthey’rewillingtotrustaninstitution,”hesaid.

Thesmartphoneiskeytoallofthis.Inthesamewaythesmartphone

allowsyoutorentyourapartmenttosomeoneelseorrentyourcartosomeone

elseorprovideridesharingtosomeoneelse,itcanalsobeusedasanATM.

Barhydtsaid,“It’samazingwhatpeoplearewillingtodoinasharedeconomy

modelandthey’rejustnotdoingitformoneyyet,maybewiththeexceptionof

peer-to-peerlending.”Moreover,hesaid,“It’smoreimportanttousthatyou

trusteachotherratherthanAbra.Ifyoutrusteachother,it’shighlylikelythat

you’regoingtogettoknowAbra,andthatyou’regoingtolikeitandyou’re

goingtohaveagoodexperience,”andultimatelytrusttheplatform.

Abraisnotaremittanceappbutinsteadanewglobalplatformforvalue

exchangethatcombinesinequalmeasurethedistributed,trustlessblockchain

network,thepowerofsmartphonetechnology,andtheveryhumaninclination

towanttotrustpeersinanetwork.Byofferinguserstheabilitytostorevaluein

traditionalcurrencies,transmitvalueacrossthenetwork,andalsopayata

growingmerchantnetwork,AbratakesonnotonlyWesternUnion,butalsothe

creditcardnetworks,likeVisa.AccordingtoBarhydt:

ThesettlementrailsforaWesternUniontransaction,andthesettlement

railsforaVisatransaction,areverydifferent.Butthesettlementrails

foranAbratransactionthat’susedforbothperson-to-personpayment,

aswellasperson-to-merchantpayments,areexactlythesame....We

havecomeupwithasinglesolutionthatworksdomesticallyorcross-

border,andthatcanbeusedforbothperson-to-personpaymentsand

person-to-merchantpaymentsforthefirsttime.

Abramighteventuallybecomeaglobaljuggernaut,rattlingthewallsofthe

biggestfinancialinstitutionsintheworld.Butfornow,it’sanelegantandsimple

solutiontoanimportantglobalproblem.Withremittancestoppinghalfatrillion

dollarsnextyear,themarketopportunityisnothingtosneezeat.

BLOCKCHAINHUMANITARIANAID

CanblockchainfundamentallytransformhowNGOs,governments,and

individualdonorsdeliverforeignaid?Hundredsofbillionsofdollarsofaidflow

annuallyintodevelopingnations,yetthemacroeconomiceffectsofaidarenot

alwaysclear.

Thereisampleevidencetosuggestthatcorruptofficials,local

strongmen,andotherintermediariesstealmuchofitlongbeforeiteverreaches

itsintendedsource.Moretroubling,accordingtotheJournalofInternational

Economics,an“increaseingovernmentrevenuesmaylowertheprovisionof

publicgoods.”Thereportconcludedthat“largedisbursementsofaid,or

windfalls,donotnecessarilyleadtoincreasedwelfare.”

Organizationalbloat

andleadershipcorruptioncombineforlotsofwasteandgreaterdisparity

betweenhavesandhave-notsinthepoorestcountries.Thisistruefordirect

foreignaidfromgovernmenttogovernmentbutalsoforNGOsthatputbootson

thegroundinhard-hitplaces.

Wetouchedbrieflyonthequestionofforeignaidinourintroduction.Let’s

exploreitfurther.RecallthattheRedCrosscameunderfireintheaftermathof

the2010HaitiearthquakeafterastudyconductedbyProPublica,an

independent,not-for-profitnewsorganization,andNationalPublicRadiofound

theorganizationsquanderedfundsanddidnotfulfillmanyofitscommitments

suchasbuilding130,000newhomes.Itbuiltonlysix.

Initsdefense,theRed

CrossarguedthatHaiti’sshoddylandtitleregistryhindereditsefforts:nobody

couldfigureoutwhoactuallyownedtheland.Asaresult,theRedCross

improvisedalessdesirablesolution.Couldablockchain-basedlandtitleregistry

improvethissituationbyprovidingcleartitleandperhapspreventunlawful

expropriation?

Foreignaidisperhapstheclearestexampleoftheineptitudeofmany

governmentsandtherent-seekingbehaviorofunethicalintermediaries,andis

thusexcellentgroundstoexploreblockchainsolutions.The2010Haiti

earthquakewasoneofthemostdevastatinghumanitariancrisesofthepast

hundredyears.

Whilethegovernmentwasparalyzedandthecrisisragedon,

thousandsof“digitalhumanitarians”convergedontheInternettohelpfirst

responderscollect,triage,andvisualizepleasforhelpfrommobilephonesof

devastatedHaitians.Originallyformedonlinebylike-mindedvolunteers,these

adhocgroupsbecameincreasinglyorganizedandeffectiveamidthecrisis.One

inparticular—CrisisCommons—madearealdifference.CrisisCommons

exemplifiesaglobalsolutionnetwork,anemergingnonstatenetworkofcivil

societyorganizations,companies,andindividuals,collaboratingtosolveamajor

problem.Thedigitalrevolutionhasenablednewnetworkstoconnectand

collaborateacrossbordersandcansolveproblemsandenableglobalcooperation

andglobalgovernance.TheInternetmakesallthispossible.Neverbeforecould

peopleorganizecollectivelytocreateapublicgoodastheydidinHaiti.This

informationlayeroftheInternetprovedvital—providingcriticalconnections,

know-how,anddataforpeopleinneedandvolunteerorganizationsalike.

Imagineiftherewasalsoavaluelayer.Whatkindofpossibilitiescouldthat

enable?

Theblockchaincanimprovethedeliveryofforeignaidintwoways.First,

bydisintermediatingthemiddlemenwhoactasconduitsoflargeaidtransfers,it

canreducethechronicproblemofoutrightmisappropriationandtheft.Second,

asanimmutableledgeroftheflowoffunds,itcompelslargeinstitutions,from

aidgroupstogovernments,toactwithintegrityandabidebytheircommitments.

Iftheydon’t,peoplewillbeabletoseetheirmalfeasanceandholdthemto

account.

OnecouldeasilyimagineUNICEFortheUN’swomen’sinitiativeusingthe

blockchaintogetfundingdirectlytowomenandchildrenwithouthavingtogo

throughlocalpowerstructures.Individualsinpoorcountriescouldsignupfor

certainbenefitsthroughadistributedledgermanagedbyanetworkofdifferent

aidgroupsactingasnodesonthenetwork.Whenparticularaidisdelivered—

say,vaccinationsfromtheRedCrossorschoolsuppliesbyUNICEF—those

“transactions”canbetime-stampedontheledger.Thiswouldreduceorperhaps

preventaidgroupsaccidentallydoublespendingonparticularpeopleor

communities,thusspreadingthebenefitsofaidmoreequitably.

Indeed,UNICEFhasbegunexploringcryptocurrencies.InJune2015,

UNICEFannouncedthelaunchofUnicoin,adigitalcurrencythatchildrencan

“mine”bysubmittinganinspirationaldrawingtotheprogram.Thecoinsare

thenexchangedforanotepadandpencil.

Thisisasmallstart,butthe

opportunitiesarelimitless.It’snotfartoimaginethehypotheticalweposedin

chapter1—orphanagesinvillagesallaroundthedevelopingworldworkingwith

UNICEFtosetupaccountsforeachchildfromthemomenttheyarrive.

Donationscouldbesplitonaproratabasisintoeachkid’spersonalindividual

account.Governments,strongmen,andothercorruptofficialssimplycouldn’t

accessit.Thepoorestandmostvulnerablechildrenintheworldwouldhavethe

fundstostartalifewhentheymoveintoadulthood.Thisisattainablewith

blockchain.

Naturaldisasterrelieforprovisionsforthepoorcannotallbepeertopeer,of

course.Oftentimes,institutionsarenotonlydesirablebutalsoessential.Butthe

blockchaincanradicallyimprovethetransparencyofhowthoseorganizations,

andotherinstitutionsintheforeignaidvaluechain,function.Everydollar

donatedtotheRedCrosscouldbetrackedfromitsstartingallthewaythrough

thevaluechaintotheindividualitdirectlybenefits.Recallourhypotheticalin

chapter1—theRedCrosscouldruncrowdfundingcampaignsforeachofits

mostimportantinitiatives—deliveringmedicalaidandfightingthespreadof

disease,waterpurification,therebuildingofhomes—andwhenyoudonateyou

wouldknowwhetheryourdollarwenttoaplankofwood,agallonofwater,ora

gauzeBand-Aid.Iffundswentmissing,thecommunitywouldknowandcould

holdtheseorganizationsaccountable.Smartcontractscouldbeemployedthat

holdtheaidgroupsthemselvesaccountable.Thefundsformajorprojects—from

housinginitiativestotheimplementationofawaterpurificationscheme—could

simplygointoescrowandbereleasedonlyafterthesuccessfulcompletionof

keymilestones—securingtitleforasite,importingrawmaterials,signinga

contractwithalocalsupplier,buildingthefinishedproduct,installingacertain

numberofcleanwateraccesspoints—isachieved.Theresult?Radically

improvedtransparencyandaccountabilityinthedeliveryofforeignaid,andthus

significantimprovementsintheendresults.

Foreignaidisthesecond-largestfundtransferfromdevelopedtodeveloping

nations,afterremittances.Blockchaintechnologycanenabletransparency,

accountability,andmoreefficientoperationsforwell-meaningNGOsandbetter

deliveryofcriticalservicesintimesofcrisisandinnormalcircumstances.Of

course,thereareamultitudeofimplementationchallenges—thingsthatmustbe

overcome.Peopleonthegroundwillneedtoknowhowtousethistechnology.

Mobilephonenetworkscouldfailinthemidstofacrisis.Craftycriminal

elementsandcorruptgovernmentsmightstillfindwaystodefraudthepoorand

destitute.Butarethesereasonsnottoexplorethistechnology?No.Thesituation

todayisdysfunctionalandinmanycasesplainlybroken.Empowering

individualsandholdingaidgroupsaccountablewillmeanmoreaidinthehands

oftherightpeople.Alleviatingpovertyandaddressingcatastrophiccrisesisthe

firstrungoftheladdertoglobalprosperity.Let’stakeachanceonblockchain.

Microfinance:Peer-to-PeerAidwithPicopayments

Microfinanceisanindustrythattranscendsbothfinancialservicesand

developmentaid.Ratherthandeliveringaidfromthetopdown,microfinance

institutions(MFIs)trytoempowerindividualstosave,invest,andbuildsmall

businesses.Moreoftenthannot,theytaketheformofcommunalsavingsco-ops,

wheremembersofthecommunitycometogethertopooltheirfundsandloan

themouttooneanotherforshort-termneeds.Whenimplementedandmanaged

properly,microfinanceoutfitscandeliverarealbenefittostruggling

communities:theyreducechronichunger,increasesavingsandinvestment,and

inmanycasesempowerwomen.

However,therearesomeproblemswithMFIstoday:First,thereisverylittle

oversightintohowtheyarerunandoccasionallytheyenablepredatoryloansand

coerciveloanrecoverymethods,strainingcommunitiesandaddingtotheir

desperation.Second,inlightofthis,governmentsindevelopingcountrieshave

foundthatthebestwaytocurbbadbehavioristooutlaworseverelyrestrict

MFIsaltogether,aswasthecaseinIndiain2010,followinganMFI

controversy.

Third,fundsdon’talwaysendupintherighthands.Thereisno

waytoensurethatthecommunitymemberwhoneedsthemoneythemost

receivesit.Fourth,theyarestilllargelyregional,limitingbothfundsandalso

opportunitytoinvestandsave.

So,peoplewhoareworkingonpovertywillaskthemselves,wheredoesthe

blockchainfitinthemixoftools?Howcanitimproveonwhatwe’redoing?

First,itwillimproveadministrativeaccountability.Aswithcorporate

transparency,donorswillbesimilarlyattractedtoanynonprofitoutfitthatuses

theblockchainforgreatertransparencyandaccountability.Additionally,if

microloansarerecordedtotheblockchainandcustomersofanMFIaregranted

permissiontoaccessthem,thentheycanholdthoseoutfitsmoreaccountablefor

badbehavior.Whatwould-beborrowerorsaverwouldchoosetheopaqueand

murkywhenshecanchoosetheopen?

Second,itcanmeanbetterprotectionofwomenandchildren.Throughsmart

contracts,fundscanbedonatedintoescrowaccounts,accessibleonlybywomen,

say,foraccessingfood,feminineproducts,healthcare,andotheressentials.The

mencan’ttakeitoutoftheirhandstobuycigarettesorbooze,ortogamble,

whichcanbeapersistentproblemwithmoneyfromsavingsormicrofinance.

Third,itwillenablepeopletosourcefundsandopportunityworldwide,and

willattractdonorsworldwide.Communitiesaretypicallylimitedbygeography

inwhichMFItheyuse.Inthefuture,awould-beborrowercouldgoonlineand

sourcethebestbidsfromanumberofpotentiallenders,findingtheonewiththe

bestrates,terms,andreputation.FormalMFIswillcontinuetoexist,ofcourse,

buttherewillbeeasierwaystoconnectpeersthroughblockchainthatwillmake

themlessnecessary.

Finally,blockchainpaymentrails,suchasbitcoin,arebasicallytailor-made

forsmall,disenfranchisedborrowersbyenablingtinypayments(picopayments,

wecallthem)andbydroppingcostsclosetozero.Inaworldwhereeverypenny

counts,usersshouldbeabletopaybackloans,withdrawfunds,andsaveintiny

increments,allofwhichwasfarmorechallenginginapreblockchainworld.

Theyshouldalsobeabletodoitinstantlyandefficiently,giventhatdespite

abjectpovertyinmanypartsoftheworld,cellphonepenetrationandInternet

connectivityarebecomingcommoditized.

SAFEASHOUSES?THEROADTOASSETOWNERSHIP

LandtitleregistrationiswhatHernandodeSotoreferredtoasanonmarketed

transaction,aneconomicexchangegenerallyinvolvingalocalgovernment.

Nonmarketedtransactioncostsincludetheresourceswastedbywaitinginline,

trackingdownownership,completingandfilingpaperwork,cuttingthroughred

tape,resolvingdisputes,greasingthepalmsofofficialsandinspectors,andso

on.

Thesecostsarerampantinpooreconomieswheresystemsareweakand

governmentofficialsareknowntobehavewithoutintegrity.Hondurasissucha

place,thesecond-poorestcountryinCentralAmericawithanextremelyunequal

distributionofincome.Theeconomicdownturnof2008stymiedtheinflowof

remittances,andamilitarycoupoustedthedemocraticallyelectedManuel

Zelayain2009.Thecoupwasbackedbyoneoftheregion’slargestlandowners,

apalmoiltycoonwhobenefitedsignificantlyinearlierlandgrabsthatcoerced

Aguáncampesinostoselltheirlandtitles.

Sincethemid-1990s,theWorldBankandotherglobalNGOs

havepoured

$125.3millionplustechnicalexpertiseintoHondurasfordesigningand

managingland-relateddevelopmentprojectsthatwouldacceleratethecountry’s

growth.

Wecameacrossplanstoincorporatespatialdatainfrastructuresthat

wouldsupportthegeotaggingofdataonlandandnaturalresourceownership

andusage,climaticandnaturalhazards,andsocioeconomicconditionsthat

municipalitiescouldusetoinformstrategicplanningandinvestment.Therewas

alsomentionofintegratingdatabasesoflandprojectswithdatabasesof

environmentalanddisastermanagementprojectsatnationalandlocallevels.

Veryambitious.

Theproblemisthattherearestillallegationsofpervasivecorruptionin

propertyregistry,landsales,anddisputeresolution,includingaccusations

againstthemiddlemen,judges,andlocalbureaucrats.AccordingtotheOfficeof

theU.S.TradeRepresentative,thepropertyregistrationsystemisstillhighly

unreliable.

Householdsinruralvillagesweresystematicallypassedoverduring

landtitleregistrationofresidences,usuallytheirmostvaluableasset,becausethe

governmentlimitedtheWorldBank’sjurisdictiontourbanzones.Inruralareas,

thecash-strappedcampesinosbenefitedleastfromlandadministrationprograms.

RuralpovertyhasnotdecreasedinHondurassince1998.Ambiguityand

corruptionmanifestthemselvesintitledisputesalloverthedevelopedworld.If

Honduraswastosufferacatastrophicnaturaldisaster,asHaitididin2010,aid

organizationsliketheRedCrosswouldbesimilarlyhamstrunginuntanglingthe

messoftitlestodeliversafe,durablehousing.

“Whatiftherewasauniversalledgerthatcouldincludeallthesedataand

infusetrustintoahighlyuntrustworthysituation?Blockchainseemstobe

particularlygoodathandlingtransactions,whichnoneoftheothersystems

necessarilyare,”saiddeSoto.“Thefactispoorcountriesarebynaturevery

corrupt,andsohavingyourtransactionledgerineverynodewithsafety

proceduresmakesthesystemefficient,cheap,andfast,butitisalsothekindof

thingthatthepoorwanttoobecauseitprotectstheirrights,”headds.

Here’s

howitworks:Theblockchainisanopenledger,meaningthatitcouldresideon

thedesktopsoftheHonduranofficialswhoneededtoreferenceit,themobile

devicesoffieldworkerswhoinputdata,andcitizenswhowanttomaintaina

copy.It’sadistributedledger,meaningthatnoneofthesepartiesownsit,andit’s

aP2Pnetwork,meaningthatanybodycouldaccessit.Injurisdictionslike

Honduraswheretrustislowinpublicinstitutionsandpropertyrightssystemsare

weak,thebitcoinblockchaincouldhelptorestoreconfidenceandrebuild

reputation.

That’swhattheTexas-basedstart-upFactomplanstodoincooperationwith

theHonduranregimeandinpartnershipwithEpigraph,atitlesoftwarecompany.

Factom’spresident,PeterKirby,said,“Thecountry’sdatabasewasbasically

hacked.Sobureaucratscouldgetinthereandtheycouldgetthemselves

beachfrontproperties.”Headdedthat60percentofHonduranlandis

undocumented.Thegoaloftheproject,whichhasnotbeensigneddefinitively,is

torecordthegovernment’slandtitlesontheblockchainledger.Kirbytold

ReutersthatHondurascouldleapfroglegacysystemsusedinthedeveloped

worldbydeployingFactom’sblockchaintechnology,anditwouldeventually

makeformoresecuremortgagesandmineralrights.

“Documentationfor

ownershipfrompatentstohousesisextraordinarilypaper-based,andthere’sno

reasonitshouldbe,otherthanhistory.Blockchainworkswithanytransactionor

interactionwherepropertyrightsandtimingmatters,”

saidKausikRajgopal,

whoheadsupMcKinsey’sSiliconValleyofficeandpaymentspractice.

Attheendofthedaywedon’tknowwhethertheHondurangovernmentwill

enforcelandtitlesregisteredontheblockchainorsustainitsuse.Inprevious

landregistrationattempts,thegovernmenthasbackedawayfromtheadditional

costsofscalingupandincludingmorepeople.Butiftheledgerdeliversreliable,

tamperproofdata,thenNGOscouldgettheadditionaldatatheyneedtoinform

andinfluencepolicydecisionsandgovernance.Ifiteliminatesfiveofthesix

stepscurrentlyrequiredtoregisterlandinHonduras,andcutsthelengthoftime

fromtwenty-twodaystotenminutes,thenthosenonmarketedtransactioncosts

droptonearlyzero.

Andperhapsitwouldenablejournalistsandrights

advocatestoshamelargeglobalcorporationsintonotpurchasingorbuildingon

orsourcingtimberorwaterfromlandthathasbeendesignatedfor

environmentalprotectionorhashistoricallybeenusedbythecampesinosor

indigenouspeoplewithoutcompensatingthemfairly.We’rehopeful!

IMPLEMENTATIONCHALLENGESANDLEADERSHIP

OPPORTUNITIES

Blockchaintechnologyisobviouslynotapanaceafortheworld’seconomicand

financialwoes.Technologydoesnotcreateprosperity;peopledo.Thereare

obstaclestoovercomeandopportunitiesforleadership.Thefirstistechnical.

AccordingtoInternationalTelecommunicationsUniondata,therearestill

significantgapsinInternetconnectivity,eitherbecausethetelecommunications

infrastructureispoororbecauseserviceisunaffordable.

Thesecondisliteracy.Usingsmartphonesandinteractingonlinerequiresa

workablelevelofliteracy.IntheUnitedStates,18percentofadultsovertheage

ofsixteenreadbelowthefifth-gradelevel,30percenthavelowmathliterary,

and43percentoftheseilliterateadultsliveinpoverty.

Literacyishighly

uneveninthedevelopingworld.InmanypartsofAfrica,literacyhoversaround

50percent,andtheproblemisevenmoreseverewhencomparingthegenders.

Forexample,inplaceslikeAfghanistan,Niger,SierraLeone,Chad,

Mozambique,andotherpoornations,thegapbetweenmaleandfemaleliteracy

isastaggering20percent.

Thethirdiscorruption.Blockchainisapowerfultool,butlikeall

technologies,itisnotinherentlygoodorbad.Peoplecanharnessbrilliant

technologies,fromelectricitytotheradioandthroughtotheInternet,for

benevolentormalevolentgoals.Weneedleadershipfromtheinstitutionsin

societythatcanleverageblockchaintechnologyforgood,suchasaidgroups,

civilsocietyorganizations,companies,andgovernments,rightdowntothe

individualswhoareconnectingtothisvastnetwork.Onlywhenthesechallenges

havebeenmetandovercomewillblockchaintechnologyfulfillitspotentialas

aninstrumentofglobalprosperityandpositivechange.

CHAPTER8



REBUILDINGGOVERNMENTANDDEMOCRACY

heRepublicofEstoniaisaBalticstatewithLatviatothesouthandRussia

totheeast.Withapopulationof1.3million,ithasslightlyfewerpeople

thanthecityofOttawa.

WhenEstoniaregaineditsindependencefromthe

formerSovietUnionin1991,ithadanopportunitytocompletelyrethinktherole

ofgovernmentandredesignhowitwouldoperate,whatservicesitwould

provide,andhowitwouldachieveitsgoalsthroughInternettechnologies.

Today,Estoniaiswidelyregardedastheworldleaderindigitalgovernment,

anditspresident,ToomasHendrikIlves,willbethefirsttosayso:“We’revery

proudofwhatwe’vedonehere,”hetoldus.“Andwehopetherestoftheworld

canlearnfromoursuccesses.”

Estoniarankssecondofallcountriesonthesocialprogressindexfor

personalandpoliticalrights,tiedwithAustraliaandtheUnitedKingdom.

Estonia’sleadershavedesignedtheire-governmentstrategyaround

decentralization,interconnectivity,openness,andcybersecurity.Theirgoalhas

beentofuture-proofinfrastructuretoaccommodatethenew.Allresidentscan

accessinformationandservicesonline,usetheirdigitalidentitytoconduct

business,andupdateorcorrecttheirgovernmentrecords.Whilemuchof

Estonia’sworkpredatestheblockchain,thecountryintroducedakeyless

signatureinfrastructurethatintegratesbeautifullywithblockchaintechnology.

Centraltothemodelofe-Estoniaisadigitalidentity.Asof2012,90percent

ofEstonianshadanelectronicIDcardtoaccessgovernmentservicesandtravel

withintheEuropeanUnion.

Thechipembeddedinthecardholdsbasic

informationaboutthecardholderaswellastwocertificates—onetoauthenticate

identityandonetoprovideadigitalsignature—andapersonalidentification

number(PIN)oftheirchoice.

Estoniansusethesetovote,review,andedittheirautomatedtaxforms

online,applyforsocialsecuritybenefits,andaccessbankingservicesandpublic

transportation.NoneedforbankcardsorMetrocards.Alternatively,Estonians

candothesamewithmobile-IDontheirmobilephones.In2013,Estonians

submittedover95percentoftaxeselectronicallyandconducted98percentof

bankingtransactionsonline.

ParentsandstudentsuseEstonia’se-Schooltotrackassignments,

curriculum,andgrades,andtocollaboratewithteachers.Estoniaaggregatesin

realtimediversehealthinformationfromvarioussourcesintoasinglerecordfor

eachcitizen,andsotheserecordsdon’tresideonasingledatabase.Each

Estonianhasexclusiveaccesstohisownrecordandcancontrolwhichdoctors

orfamilymembershaveaccesstothesedataonline.

Since2005,citizenshaveusedi-votingfortheirnationalelections.Using

theirIDcardormobile-ID,Estonianscanloginandvotefromanywhereinthe

world.Inthe2011parliamentaryelection,citizenscastalmost25percentof

ballotsonline,upfrom5.5percentinthepreviousparliamentaryelection.The

peopleobviouslylikeandtrustthesystem:thenumberwentupagainforthe

2014EuropeanParliamentelectionsinwhichathirdofvotersparticipatedover

theInternetfromninety-eightdifferentcountries.TheEstoniancabinetusesa

paperlessprocessandmakesalldraftlegislationaccessibleonline.Theaverage

lengthofweeklycabinetmeetingshasgonefromaroundfivehourstounder

ninetyminutes.

Estoniahasanelectroniclandregistrythathastransformedtherealestate

market,reducinglandtransfersfromthreemonthstoalittleoveraweek.

Inthe

lastfewyears,Estoniahaslauncheditse-Residencyprogram,whereanyonein

theworldcanapplyfora“transnationaldigitalidentity”andauthenticationto

accesssecureservices,encrypt,verify,andsigndocumentsdigitally.An

entrepreneuranywhereintheworldcanregisterhisorhercompanyonlinein

fewerthantwentyminutesandadministerthecompanyonline.These

capabilitiescontributetoEstonia’simageasadigitalcountry.

Noneofthiswouldworkorbeacceptablewithoutsolidcybersecurity.As

MikeGault,CEOofGuardtime,noted,“Integrityisthenumber-oneproblemin

cyberspaceandthisiswhatEstoniarecognizedtenyearsago.Theybuiltthis

technologysothateverythingongovernmentnetworkscouldbeverifiedwithout

havingtotrusthumans...itisimpossibleforthegovernmenttolietoits

citizens.”

Estonia’scybersecurityderivesfromitskeylesssignatureinfrastructure

(KSI),whichverifiesanyelectronicactivitymathematicallyontheblockchain

withoutsystemadministrators,cryptographickeys,orgovernmentstaff.This

capabilityensurestotaltransparencyandaccountability;stakeholderscansee

whohasaccessedwhichinformation,when,andwhattheymayhavedonewith

it.Consequently,thestatecandemonstraterecordintegrityandregulatory

compliance,andindividualscanverifytheintegrityoftheirownrecordswithout

theinvolvementofathirdparty.Itlowerscosts:therearenokeystoprotect,and

nodocumentstore-signperiodically.Accordingtoe-Estonia.com,“WithKSI,

historycannotberewritten.”

Clearly,blockchaintechnologyappliesnotonlytocorporationsfixatedon

profitsbutalsotopublicinstitutionsfocusedonprosperityforall,from

government,education,andhealthcaretoenergygrids,transportationsystems,

andsocialservices.Wheretostart?

SOMETHINGISROTTENINTHESTATE

InhisGettysburgAddressin1863,AbrahamLincolnsaidthatsociety’sgreatest

goalwasa“governmentofthepeople,bythepeople,forthepeople.”Twelve

decadeslater,PresidentRonaldReagansaidinhis1981InauguralAddress,

“Governmentisnotthesolutiontoourproblem;governmentistheproblem.”

Manyinthenascentblockchainecosystemagree.Ina2013survey,over44

percentofbitcoinusersprofessedtobe“libertarianoranarcho-capitalistswho

favoreliminationofthestate.”

Libertariansofallstripestendtosupportbitcoin.It’sdecentralizedandfree

fromgovernmentcontrol.It’sanonymousanddifficulttotax.Itresemblesgold

initsscarcity,andlibertariansfavorthegoldstandard.It’sapuremarket,driven

bysupplyanddemandratherthanquantitativeeasing.Notsurprising,thefirst

2016presidentialcandidatetoendorsebitcoinforcampaignpaymentwasRand

Paul.

Thelibertarianbenthasgivenopponentsofdigitalcurrenciesfodderfor

dismissingblockchaintechnologiesoutright.JimEdwards,foundingeditorof

BusinessInsiderUK,wroteofthelibertarianparadisehecalledBitcoinistan,a

countrylikeSomalia“withaslittlegovernmentinterferenceaspossible,ina

marketfreeofburdensomelawsandtaxes.”Hedescribedtheparadiseas“atotal

nightmare...characterizedbyradicalinstability,chaos,theriseofaboss-class

ofcriminalswhoassassinatepeopletheydon’tlike,andamasshandoverof

wealthtoaminorityevensmallerthantheonepercentthatcurrentlylaudsitin

theUnitedStates.”

Certainly,weliveinacrisis-rackedworld.“Theworldhasnotseenthis

muchtumultforageneration.Theonce-heraldedArabSpringhasgivenway

almosteverywheretoconflictandrepression,”wroteKennethRoth,executive

directorofHumanRightsWatch,foundedinthe1970stosupportcitizengroups.

“Manygovernmentshaverespondedtotheturmoilbydownplayingor

abandoninghumanrights,”usingtheInternettospyoncitizens,usingdronesto

dropexplosivesoncivilianpopulations,andimprisoningprotestersatmega

publiceventsliketheOlympics.

That’sthewrongresponsetoturmoil,accordingtorenownedPeruvian

economistHernandodeSoto.“TheArabSpringwasessentiallyandstillisan

entrepreneurialrevolution,peoplewhohavebeenexpropriated,”saiddeSoto.

“Basically,it’sahugerebellionagainstthestatusquo,”andthestatusquois

serialexpropriation—therepeatedtramplingofcitizens’propertyrightsbytheir

governmentsuntiltheyhavenochoicebuttoworkoutsidethesystemtomakea

living.

Sotramplingmorerightsistheworstpossibleresponsebecauseitpushes

morepeople—suchasjournalists,activists,andentrepreneurs—outsidethe

system.Duringthepasttwentyyears,voterturnouthasdroppedinmostWestern

democracies,includingtheUnitedStates,theUnitedKingdom,France,

Germany,Italy,Sweden,andCanada.Inparticular,youngpeoplearelookingto

bringaboutsocialchangeoutsidethesystem,certainlynotbyvoting.Most

AmericansthinktheirCongressisdysfunctionalanddeeplycorrupt.Andfor

goodreason:asinmanycountries,U.S.politiciansarebeholdentowealthy

contributorsandinterestgroups,andmanymembersofCongressgoonto

becomelobbyists.Caseinpoint:92percentofAmericanswantbackground

checksofpeoplebuyingguns,buttherichandpowerfulNationalRifle

Associationthwartsanylegislationtoeffectchange.Somuchfora“government

ofthepeople,bythepeople,forthepeople.”

Themorecitizensdon’tfeeltheirpoliticalinstitutionsreflecttheirwilland

supporttheirhumanrights,themoretheseinstitutionsoversteptheirauthority,

themorecitizensquestionthelegitimacyandrelevanceoftheinstitutions.

PoliticalsociologistSeymourMartinLipsetwrotethatlegitimacyis“the

capacityofapoliticalsystemtoengenderandmaintainthebeliefthatexisting

politicalinstitutionsarethemostappropriateandproperonesforthesociety.”

Andincreasinglyyoungpeoplelooktobringaboutchangethroughmeansother

thangovernmentsandevendemocracy.Thebumpersticker“DON’TVOTE!IT

ONLYENCOURAGESTHEM”tellsthestory.

“Forindividuals,itmightnotbedesirableforthemtobeinasearchable,

verifiabledatabaseofrecordedhistorythatgovernmentscouldpotentiallyuseto

exploitorsubjugatepeople,”deSotosaid.“Thelegislationofmostofthe

countriesintheworldissobadlydone,sounwelcoming,thatthecostofcoming

intothelegalsystemdoesn’tmakesensetopoorpeople.Andacountrywithtoo

manypooranddisconnectedpeoplecausestoomanyproblems.”

Aslegitimacyfades,libertarianismascends.Butit’snottheanswertowhat

ailsthebodypolitic.Inthistroubledworld,weneedstronggovernments,and

onesthatarehighperformance,effective,responsive,andaccountableto

citizens.

Whatshouldgovernmentsdo?“Build,streamline,andfortifythelawsand

structuresthatletcapitalismflourish,”deSotowroteinTheWallStreetJournal.

“Asanyonewho’swalkedthestreetsofLima,TunisandCairoknows,capital

isn’ttheproblem—itisthesolution.”

Sowhat’stheproblem?“Gettingtheir

peopleidentified,”hetoldus.“Thereisnowayagovernmentcangoinand

forcepeopleinsidethesystem.SoIthinkthatgovernmentsallovertheworld

rightnowarewillingtoturnthesystemaround.”

That’swheretheblockchaincomesin.Thedesignprinciplesofthe

blockchainshoulddrivethistransformationasitsupportsandenableshigher

levelsofthefollowing:

Integrity.Torebuildthepublic’strustinpoliticalinstitutions,elected

officialsmustbehavewithintegrity.Trustmustbeintrinsictothesystem,

encodedineveryprocess,notvestedinanysinglemember.Becausethe

blockchainsupportsradicaltransparency,itisbecomingcentraltorebuilding

trustbetweenstakeholdersandtheirrepresentatives.Ongoingtransparencyis

criticaltomaintainingthisrelationship.

Power.Everyonehasarighttotakepartinthegovernment,directlyorby

voting.Whoeveriselectedmustconductaffairsinthefulllightofdayasapeer

amongpeers.WiththeInternet,citizenstookmoreresponsibilityfortheir

communities,learnedfromandinfluencedelectedofficialsandviceversa.With

blockchain,citizenscangoonestepfurther:theycanadvocateforsealing

governmentactioninthepublicrecordinanunalterableandincorruptibleledger.

Notjustchecksandbalancesamongthepowerfulfewbutbroadconsensusof

themany,forexample,toeffectbackgroundchecksonpotentialgunowners.

Value.Votesmusthavevalue.Thesystemmustaligntheincentivesofall

stakeholders,beaccountabletocitizensratherthanbigmoney,andinvesttax

dollarswisely.Themachineryofgovernmentmustbehighperformance,better

andcheaperwithtechnology.

PrivacyandOtherRightsPreserved.Nospyingoncitizens,noarbitrary

interferencewithprivacy,family,orhome,noattacksuponanyone’shonoror

reputation.Noarbitraryseizureofproperty—realestateorintellectualproperty

suchasthepatentsofinventors—withoutcompensation.Nocensorshipofnews

organizations,nointerferencewitheffortstoassemble.Peoplecanregistertheir

copyrights,organizetheirmeetings,andexchangemessagesprivatelyand

anonymouslyontheblockchain.Bewareofanypoliticianwhoarguesfortrade-

offsbetweenpersonalprivacyandpublicsecurity.Remember,it’safalse

dichotomy.

Security.Everyonemusthaveequalprotectionofthelawwithout

discrimination.Noarbitrarydetentionsorarrests.Noonepersonorgroupof

peopleshouldliveinfearoftheirowngovernmentorlawenforcementagencies

orbesubjectedtocruel,inhumane,ordegradingtreatmentfrommembersof

thoseagenciesbecauseoftheirrace,religion,orcountryoforigin.Membersof

policeforcescan’twithholdevidenceofundueuseofforce,andevidencecan’t

gomissing.Itwouldallbeloggedandtrackedontheblockchain.

Inclusion.UsingtheInternet,citizensbecamemoreinvolved,learnedfrom

oneanother.Withtheblockchain,thesystemcancost-effectivelyengageall

citizens,recognizeeveryoneasapersonbeforethelaw,andprovideequalaccess

topublicservices(e.g.,healthcare,education)andsocialsecurity.

Technologyisapowerfultoolbutitalonecannotachievethechangewe

need.Inthespiritofthesaying“Thefutureisnotsomethingtobepredicted,it’s

somethingtobeachieved,”let’sreinventgovernmentforaneweraoflegitimacy

andtrust.It’stimetostopthetinkering.

HIGH-PERFORMANCEGOVERNMENTSERVICESAND

OPERATIONS

Thecriticsof“biggovernment”arerightinonesense.Whenitcomesto

efficiency,governmentservicesandoperationshavealongwaytogo.

Governmentsareorganizedintosilosthatdon’tshareinformation.Bureaucracy

toooftentrumpscommonsenseorsharedpractices.Citizensrarelyhaveone-

stopshoppingforgovernmentservices.Everycountryhascountlesstalesof

politiciansandbureaucratssquanderingtaxpayerdollars.

Blockchaincanimproveclientservice,increaseefficiency,andimprove

outcomeswhileenablingbothintegrityandtransparencyofgovernment.The

potentialtoimproveallfacetsofgovernmentissignificant,butsomeare

especiallyimportantinthedevelopingworld,wheregovernmentsare

establishingnewprocessesandcanleapfrogthesystemsoflong,stable,and

opengovernments.

Let’slookattwobroadareaswherewecanapplytheblockchain:integrated

governmentandthepublicsectoruseoftheInternetofThings.

IntegratedGovernment

Estoniaiscuttingadministrativeinefficienciesandprovidingintegratedservices

toitsresidentsandbusinessesbycreatinganelectronicIDcardforeveryoneand

usingablockchain-enabledInternetbackboneknownasthe“X-road”toconnect

acrossmultipleprogramsanddatabasesinbothpublicandprivatesectors.

Otherscandoit,too.

ManycountriessuchasCanada,theUnitedKingdom,andAustraliahave

explicitlyrejectedtheconceptofacentralpopulationregistryandsingle

governmentIDasamatterofpublicpolicy.Thisdecisionstemsfromaconcern

forpersonalprivacyandanaversiontoexpandingstatepower,especiallyin

grantingorrevokingidentities.

However,asEstoniashows,ifwehashofficialdocuments(passport,birth

certificate,marriagelicense,deathcertificate,driver’slicense,healthcard,land

titles,voterID,businessregistration,statusoftaxpayments,employment

number,schooltranscripts,etc.)thatcurrentlyexistinmultipledatabasesintoa

singleblockchain,blockchain-enablednetworkscoulddeliverintegratedservices

withoutgoingthroughanycentralprocessing.Notonlycouldthismodelprotect

privacy,itcouldenhanceitbyallowingpeopletoverifytheaccuracyoftheir

information,andtoseewhoaccessedoraddedtothatinformation(i.e.,a

permanentinformationaudit).

Infact,inthefutureitmakessensethateachcitizenownsheridentity

informationratherthanagovernment.Asweexplainedinchapter1,justas

networksandmasscollaborationcaneliminatetheneedforagovernmentto

issuecurrencyorforabanktoestablishtrust,peoplewon’tnecessarilyeven

needagovernment-issuedidentitycard.SaidCarlosMoreiraofthe

cryptographicsecuritycompanyWISeKey,“Todayyouneedanorganization

withendowedrightstoprovideyouwithanidentity,likeabankcard,afrequent

fliercard,oracreditcard.Butthatidentityisnowyoursandthedatathatcomes

fromitsinteractionintheworldisownedbysomeoneelse.”

Onthe

blockchain,theindividualownstheidentity.Your“personalavatar”coulddecide

whatinformationisprovidedtowhomunderyourcommand.Itcouldalsomake

choicesaboutintegratingdata.However,ratherthaneverythingyoudowith

governmentbeingintegratedinsomemassivegovernmentdatabase,the

integrationisachievedbythevirtualyou—ownedandcontrolledbyyou.

Betterintegrationwouldsupportlifeeventssuchasmarriage.MelanieSwan,

founderoftheInstituteforBlockchainStudies,explained:“Theblockchain—

withitsstructurethataccommodatessecureidentities,multiplecontracts,and

assetmanagement—makesitidealforsituationssuchasmarriagebecauseit

meansacouplecantietheirweddingcontracttoasharedsavingsaccount,andto

achildcarecontract,landdeed,andanyotherrelevantdocumentsforasecure

futuretogether.”

Somehavesuggestedthattheblockchaincouldbecomea

publicdocumentsregistryoutsideanygovernmentsanctionorinvolvement.The

world’sfirstblockchain-recordedweddingtookplaceatWaltDisneyWorld,

Florida,inAugust2014.Smartprenuptialcontracts,anybody?

Beyondintegratedservices,governmentscouldregisterandmanage

documentswithtransparencyandreliability.Considerthestafftimespentin

issuing,verifying,updating,renewing,andreplacingpeople’sofficial

governmentrecords.Inadditiontoensuringdocumentveracity,blockchain-

enabledregistrationthroughpeer-to-peernetworkswouldsupportself-service,

wherepeopleverifyadocumentthroughthenetwork,notthrougharegistrar,as

wellaspersonalizedservice—whenyougenerateanofficialdocument,it

automaticallycontainsyourrelevantinformationandaccessrightstothat

information,andtrackswhoaccessesandusesitinthedocumentmetadata.

Forexample,theU.K.governmentisinvestigatingtheuseoftheblockchain

inmaintainingnumerousrecords,especiallyforensuringtheirintegrity.Paul

Downey,atechnicalarchitectwiththeU.K.GovernmentDigitalService,noted

thattheperfectregister“shouldbeabletoprovethedatahasn’tbeentampered

with”andshouldstoreahistoryofthechangesthathavebeenmade,plus“be

opentoindependentscrutiny.”

Blockchain-basedsystemscaninfuseefficiencyandintegrityintodocument

registriesofallkindsandmanyothergovernmentprocesses.Let’scombine

supplychainmanagementwiththeInternetofThingstotaganewpieceof

equipmentwithasmartchipthatcommunicatesitsprovenance,ownership,

warranties,orspecialinformation.Governmentprocurementofficescouldtrack

itemsandautomateprocessesateverystep:purchasing,releasingpayment,

payingsalestaxes,renewingalease,ororderinganupgrade.That’ssimply

betterassetmanagement,reducingadministrativecoststotaxpayerswhile

increasingrevenuestogovernments.

Particularlyinterestingarenationalandlocalopportunitiestoconnect

differentblockchainnetworksforgreaterefficiencyacrossjurisdictions.For

example,departmentsofmotorvehiclescouldconnectdrivers’databasesacross

stateorprovincialboundariestocreateavirtualdatabasethatfacilitates

confirmationofdriveridentity,status,andtrackrecord.OrintheU.S.health

caresystem,“Supposethepatient,insurancecompany,doctorandagovernment

payerallhadtheirfinancialrecordscometogetheronasingleledger,visibleto

all,foranygiventransaction.Thepotentialfortransparencywouldbematched

onlybytheopportunitiesfornewlevelsofefficiency,”saidSwan.

TheInternetofPublicThings

WealreadywroteaboutpublictransportationontheInternetofThings.That’s

perhapstheeasierIoTopportunityforgovernment:recordsmartdevicesina

blockchainledgerforlifecycleassetmanagementofbuildings,workand

meetingspaces,vehiclefleets,computers,andotherequipment.Aswith

bAirbnb,governmentemployeescoulddynamicallymatchavailablesupplyand

demand,loweringsecurity,maintenance,andenergycoststhroughautomated

access,lighting,andtemperaturecontrols,andtrackinglocation,repairs,and

roadworthinessofgovernmentvehicles,aswellasthesafetyofbridges,rails,

andtunnels.

Publicleaderscouldalsoachievebetterpublicoutcomesininfrastructure

management,energy,wasteandwatermanagement,environmentalmonitoring

andemergencyservices,education,andthehealthsector.Inadditionto

improvingefficiencybenefits,theseblockchain-enabledapplicationscouldalso

improvepublicsafetyandhealth,easetrafficcongestion,andreduceenergy

consumptionandwaste(e.g.,throughleakypipes),tonamebutafewbenefits.

SecuringInfrastructure

Byintelligentlypartneringwiththeprivatesectorandotherstakeholders,the

governmentofEstoniahascreatedapublicsectorinfrastructurethatenables

muchgreaterconvenienceandaccesstogovernment,banks,publictransit,and

otherservicesforitscitizenry.Inadditiontoconvenience,Estoniaalsogains

competitiveadvantageintheglobaleconomy,attractingbusinessandinvestment

tothecountry.

Governmentsalreadyprovideservicestoneighboringjurisdictions(fireand

ambulance);outsourcetootherjurisdictions(dataprocessing);deliverservices

onbehalfofanotherjurisdiction(federalgovernmentprocessingincometaxes

onbehalfofboththenationalandprovincial/stategovernments);andsharing

services(sharingofficebuildings).

Estonia’se-Residentserviceisusefulforindividualsanywhereintheworld

whoneedanofficialIDtolaunchabusiness,particularlyonline.Estoniais

positioningitselftoprovideservicestoforeigncitizensthatothercountriesare

choosingnottoprovide.Whiletheservicesavailablenowarefairlylimited,

thereisnolimittoothergovernmentservicesultimatelybecomingdigitalfrom

endtoend.Forexample,publiclyfundedlibrariesthatarefreetolocalresidents

couldofferaccesstotheirdigitalcollectionstononresidentsandscholars

anywhereintheworldforasmallfee.Whatotherservicesmightlend

themselvestosimilartreatment,especiallydigitalserviceswheredata

managementandintegrityareimportant?

Offeringgovernmentservicesbeyondnationalbordersoftencomeswith

regulatoryhurdles.However,weliveinanincreasinglyglobalizedworldwhere

manyofourbiggestchallengesarenotexclusivetoonejurisdiction.Global

problemsrequirenewmodelsforproblemsolving,forworkingwithother

stakeholders.Policythattreatsbordersasporous,combinedwithblockchain

technologysuchastheInternetofThings,coulddomoretoaddressbig,

intractableissues.

EMPOWERINGPEOPLETOSERVESELVESANDOTHERS

Blockchain-enablednetworksmakegovernmentservicesmorerobustand

responsive.Self-service,inanythingfromrenewingapermittogettingan

officialdocument,willimprovehowgovernmentsoperate.Byfreeinguptime,

removingthepotentialforcorruptionorotherartificialbarriers,providingself-

trainingmodulesonline,andpayingcitizenstheirsocialsecurityfundsontime,

governmentsempowertheircitizens.

Newmodels,manytobedefined,canempowerpeopletocollaborateon

publicpolicygoals.Throughtheblockchain,wecanstrikeanewand

appropriatebalancebetweengovernment’sneedforcontrolandaccountability

foranentirebudget,andtheneedforindividualsandgroupstocontroland

contributetoportionsofthatbudget.Somejurisdictionshavebeenexploring

newmodelstogiveindividuals(recipientsofbenefitsfrommultiplegovernment

programs)orcommunities(neighborhoods),orevenentirepopulations

(citywide)controloftheirownpersonalbudgetspreviouslycontrolledbycivil

servants.

Forexample,ratherthanrequiringindividualstoapplytomanydifferent

governmentprogramsforvariousbenefits,eachwiththeitsowncriteria

(income,assets,numberandageofchildren,typeofhousing,levelofeducation,

etc.),thegovernmentplatformcouldpersonalizeabudgetbasedonidentity,

storedinformation,andproductionandconsumptionpatternsincludingrisk

factorssuchasresidenceinpoorzipcode,levelofeducation,andpurchaserates

ofcigarettes,alcohol,andprocessedfoods.Theindividualcouldthendecide

howtousetheresourcestoachievehisorherobjectivesaccordingtohisorher

circumstances.

Imaginethat—ratherthanpersuadingsomebureaucratthatyourchildneeds

anewwintercoat,youcandecideonyourown!Theresultisincreasedpersonal

accountabilityandempowerment.Wecoulddothesameatthecommunitylevel

(portionsofbudgetsrelatedtocommunity-specificservicessuchasparksand

communitycenters)oratacross-governmentlevel(establishingprioritiesand

thenspendingdiscretionarybudget).

Somejurisdictionsarealreadyempoweringtheleastadvantaged.

The

blockchaincouldacceleratethistrend,allowingtaxpayerstoseewheretheir

dollarsareflowing,howfellowcitizensareusingtheseresources,andwhether

programsareachievingresults(incomechanges,educationalgoalsreached,

housingfound,etc.).Theplatformreducesoreveneliminatestheneedfortime-

consumingandcomplexmonitoringandreport-backs.Whilethevastscopeof

thedataandhowthey’retrackedthroughpeer-to-peernetworksmaysoundscary

andOrwellian,itisactuallyjusttheopposite.Ratherthanallthedataand

authorityrestinginthehandsofsomecentralauthorityoranonymous

bureaucrat,individualsandcommunitiescouldactbasedonverifiedand

trustworthyinformation.Atthesametime,theblockchainledgerassures

accountabilityfortheuseofpublicfunds.Wecannowachievetwopreviously

seeminglycontradictorygoals:“moregovernment”throughmoreinformation

andcontext;and“lessgovernment”throughprovidinginformationandbetter

toolsforindividualandgroupdecisionmakingandactionwithinthatcontext.

StreamingOpenandTrustedData

PerianneBoring,founderandpresidentoftheChamberofDigitalCommerce,

championstheideathatdistributedledgersopenupgovernmentforthebetter.To

her,“Blockchainenablesradicaltransparencybecauseitprovideseveryonewith

provablefacts.Anyonecanviewanytransactionthathaseverhappenedonthe

blockchain.”

Governmentscaneasilyprovidedatathatotherscanuseforpublicorprivate

good.Thisdiffersfromso-calledFreedomofInformationlegislationwhere

citizensmustrequestaccesstoimportantgovernmentinformation.Ratherthis

involvesthereleaseofassets—actualdata.Governmentscouldreleasethousands

ofcategoriesofdatainrawformat,strippedofpersonalidentifiers:traffic

patterns,healthmonitoring,environmentalchanges,governmentproperty,

energyusage,governmentbudgetandexpenditures,expenseaccounts.Citizens,

companies,NGOs,academics,andotherscouldanalyzethesedata,puttheminto

applications,mapthem,andotherwiseusethemfor,say,understanding

consumerdemographictrends,researchingpatternsinhumanhealth,orknowing

whetherthebusisgoingtobeontime.

AsofAugust2015,theU.S.governmenthasalreadypublished165,000data

setsandtoolsonitsOpenGovernmentWebsite.

TheU.S.government’s

philosophythatgovernment-helddataispublicdatahasmadeitapioneerin

transparency.Othergovernmentsarefollowingsuit.AsofAugust2015,the

U.K.governmenthasreleased22,000datasets.

Releasingdatathroughpeer-to-peernetworksandtheblockchainwill

introduceevengreaterlevelsofefficiency,uniformity,utility,andtrust.Making

datapublicisanincentiveforensuringdataaccuracy.Peoplecanviewandflag

datawhentheyfindanerrororcanprovethatdatahavebeenalteredor

corrupted.

Ifyouregisteracompletedatasetinablockchainnetwork,thenthenetwork

canlogadditionsandchangestothedatasetandcanblockeffortstotamperwith

thedata.Noneedforacentraladministrator.Governmentscouldreleasemore

programmaticdatatohelpthepublicandanalystsunderstandtheseprograms

andtheirimpact.

PartneringtoCreatePublicValue

We’vealreadyseenhowsimplymakingmoretrustedinformationavailablecan

beusedforpositiveeconomicandsocialvalue,andhowindividualsand

communitiescanbeempoweredtoimprovetheirownlives.Blockchain-enabled

peer-to-peernetworkswillrequireustorethinkhowwedivideresponsibilityin

creatingpublicvalue.Whengovernmentspublishrawdata,theybecomea

platformonwhichcompanies,thecivilsociety,andothergovernmentagencies

andindividualscanself-organizetocreateservices.Wehaveused“payfor

success”modelsforafewyearsnowtoengagebusinessesinsolvingcivic

problems.Forexample,theU.S.DepartmentofLaborfundedinitiativesthathire

ex-offendersandreducerecidivism,andtheCityofChicagoraisededucation

levelsamongdisadvantagedpreschoolers.

Thismodelalsoencouragesinnovationandincentivizesachievementof

desiredresultsbyreleasingfundsonlywhentheseresultshavebeenachieved

andaremeasurable.Thinkaboutthepowerofongoingmicropaymentstoasmall

not-for-profitgroupworkinginacommunityonsustainableenergyinitiatives.A

governmentprogramcouldlinkfundingtoactualdeclinesinconsumption.The

not-for-profitgroupcouldsupportitselfwithouthavingtorelyoncomplex

paperworkforreimbursementandmightevensecurefinancingbasedonthe

government’scommitmenttoitsparticipationinthe“payforsuccess”model.

PeggingSmartSocialContractstoPoliticalReputations

Justasthebitcoinnetworkusesblockchaintechnologytoconstantlyensurethe

integrityofpayments,governmentnetworkscanuseblockchainstoensurethe

integrityoftheirtransactions,records,andimportantdecisions.Officialscan’t

hide“offthebook”paymentsorothergovernmentrecords,includinge-mail

records,decisionlogs,anddatabases.Whereassecurityoftenderivesfrom

fences,walls,oraperimeterofprotection,theblockchainprotectsagainst

tamperingfrombothinsideandoutside.Therefore,itkeeps“honestpeople

honest.”

Transparencyiscrucialforchangingthebehaviorofaninstitution.Whilewe

ofcoursecannotforcethesevaluesandbehaviorsonourpublicrepresentatives,

wecanlimittheirdecisionsandactionsthroughsmartcontractsthatdefinetheir

rolesandresponsibilitiesasourrepresentativesandthenmonitorandmeasure

themontheblockchain.

Remember,smartcontractsareself-executingagreementsstoredonthe

blockchain,whichnobodycontrolsandthereforeeveryonecantrust.Political

factionssuchastheGrandOldPartycouldusethemsothatcandidateslike

DonaldTrumpwhousetheirpartyinfrastructuretodebateandcampaignduring

primariescouldn’trunasindependentsinageneralelection.Wecouldapply

smartcontractstodifferentgovernmentoperations(supplychain,externallegal

services,pay-for-successcontracts)andevenmorecomplexrolesofgovernment

andourelectedrepresentatives.Wedoforeseepeer-to-peernetworkstrackingan

electedofficial’scommitmentsandhisorherfulfillmentofthesecommitments.

Watchdogsalreadydothisthroughformalandinformalpeernetworksonthe

Web.

Whilethisapproachcouldnotapplytoeverythingweexpectfromour

politicalleaders,wecoulduseitforallmannerofspecificcommitmentsand

actions.Whilemeasurementofeventualoutcomeswillbemoreofachallenge

(e.g.,resultsachievedwithmoneyspent),overtimewewillbuildexperienceand

expertisewithindicatorssothatwebaseourassessmentsonfactsratherthan

currentspin.Thisisnotpieinthesky—inLondon,acandidateinthe2016

mayoraltycampaigniscallingalreadyfortheuseoftheblockchaintohold

electedofficialsaccountableforpublicbusiness.

Regulatorscouldimplementblockchainprocessesasaverifiablemeansto

trackthecommitmentsofregulatedindustriesinrealtime,assessingwhether

theyarefollowingthroughonpromisesmade(e.g.,investmentsinsustainable

energy)orcomplyingwithregulatedpractices(e.g.,on-timedelivery,safety

targets).Whilepublicationofkeyperformanceindicatorsandresultsonpublic

Websitesisincreasinglycommon,theblockchainwouldenabletheseprocesses

tobeautomatedandguaranteedaccuratewhenappliedtomeasurableresults.

Thedatageneratedbytheseprocessesensurethatthepublicisconstantly

awareofwhoisbehavingwithintegrity.Howoftendidheshowupatmeetings?

Howdidhevote?Didheabidebyhiscommitmentstodosuch-and-such?Who

donatedtoherpoliticalcampaign?Whoviolatedthetermsofhersmartcontract?

Electedofficialsandthoseregulatedmusthonortheircommitmentsorexplain

whytheyhaven’t.Italsoprovidesfeedbacktotheelectorateonwhethertheir

demandsasconstituentsarereasonableandfair,notreactionary.Votersoften

wantmoreservicesbutlowertaxes,ormorefactoriesbutnotintheirbackyard,

orlowerpricesbuthigherwages.Assuch,opendataprovidesameansof

understandingtrade-offsandincreasingtheaccountabilityofallparticipants.

THESECONDERAOFDEMOCRACY

Whilerepresentativedemocracyiscomplexandvariesglobally,onething

remainsconstant:passivecitizenry.Todatethediscussionhasfocusedonhow

blockchaintechnologycanhelpcreatetheconditionsforfair,secure,and

convenientvotingtooccur.Tobesure,wehavebigopportunities.Onlinevoting

basedontheblockchainwouldenablecitizenstogivetheirviewsmoreoften.

Butattemptingtoreplacerepresentativedemocracywouldbeamistake.

“Motionsputtoavoteareusuallywellrefineddistillationsoflargeandcomplex

issues.Theyresultfromalongprocessinvolvingconflicts,contradictionsand

compromises.Tounderstandamotionandtovoteresponsibly,citizensneedto

participateinsomeformofrefiningprocess,”DonwroteinTheDigital

Economymorethantwentyyearsago.

However,ifweunderstandthecontours

ofanewmodel,wecanseehowblockchaintechnologycanhelpfarbeyond

voting.

TechnologyandDemocracy:NotaHappyStory

Howhastechnologyaffecteddemocracy?Surprisingly,thestoryismixedat

best.Televisionarguablydegradeddemocraticdiscussion,turningwhatAlGore

called“themarketplaceofideas”

intoaone-waydialogue.Addequallytoxic

cablenews—wheretalkingheadswinratingsbyattackingopponentsratherthan

discussingideas—andyou’vegotstupefyingbattlesofextremes.Asthe

fictitiousnewsanchorHowardBealeinthefilmNetworksaid,“I’masmadas

hellandI’mnotgoingtotakethisanymore!”

SofartheInternethasn’tchangeddemocracyforthebetter.Ifanything,with

increasedsurveillanceandinfringementofprivacyonthepretextofnational

security,democraticgovernmentsarebehavingmorelikeauthoritarianregimes.

We’dliketofocusonthreeparticularchallenges.

1.FragmentingPublicDiscourse

AlGorehopedthedigitalagewouldreversethetideofnegativityerodingour

basicinstitutions.“Thegreatestsourceofhopeforreestablishingavigorousand

accessiblemarketplaceforideasistheInternet.”

Hewasnotalone.Wehave

longarguedthatastheWebextendsinusage,resources,andconnectivity,

increasedaccesstofactualinformationwouldimprovethequalityofpublic

discourse.

However,theoppositeseemstobeoccurring:balkanizationofperspectives

andexploitationofthenewtoolsbyideologueswhoorganizeintobattalions.

Todayascontentproductionbecomesmoredistributedandthesourcesof

informationandopinionproliferate,anyonecanpresentacertainviewand

attractalike-mindedaudience,whichmaybesmallbutmayalsobezealous.

Thenewcommunicationsanddataanalysistoolshavealsoallowed

ideologicallydrivengroupstohijacksocialandpoliticaldebates.Bothliberals

andconservativesareusingthemtocreateechochambersthatunderminethe

potentialforcompromise,letaloneconsensus.

2.ScalingIgnoranceontheWorldWideWeb

Justaspeoplecan’ttellapersonfromadogontheInternet,theycan’talways

discernthetruth.Conspiracytheoristspopularizetheirantievidenceviewsin

daysorevenhours,

mostrecentlythosearoundthecrashofMalaysiaAirlines

FlightMH370.ConsiderthatthreeintenAmericansnowbelievethathuman

beingshaveexistedsincethebeginningoftime.

Anddespiteoverwhelming

scientificevidencethatcarbonemissionsthreatenlifeonEarth,thosewithshort-

termvestedinterestshaveeffectivelydenigratedthescienceandblocked

intelligentdiscussion,letaloneactionplans.ThoseusingtheWebtofurther

ignoranceanddenialismareoutgunningscientistsandrationalists.

InternationallyrepressivecountriesfromIrantoNorthKoreaarecreating

private,restrictedversionsoftheInternetfortheircitizens,makingtheWeban

evermorepowerfultooltotrumprationalismwithideology.

3.ComplicatingPolicyandImplementation

Inthepredigitalera,enactingandenforcingpolicywaslesscomplicated.Policy

specialistsandpresidentialadvisershadstrongcommandoftheissues.Today

theycanbarelykeeppacewithdefiningtheproblems,letalonecraftingthe

solutionsorexplainingthemtothepublic.SobadistheproblemthatPresident

ObamasignedintolawthePlainWritingActof2010requiringfederalagencies

touselanguagethepubliccanunderstand.

Today,manyunforeseenissuesarisebetweenelections.Nogovernmentcan

crediblyassertthatithasavotermandatetotakespecificactionsonallpertinent

issues.Moreover,governmentslacksufficientin-housepolicyexpertiseonmany

issues.Soevenifagovernmentcommissionsanopinionpolltodiscernthe

public’sview,thepollingprocessdoesn’ttapintothewisdomandinsightthata

nation’scitizenscancollectivelyoffer.

PuttingDemocracyontheBlockchain

Alloftheseproblemssuggestanewmodelofdemocracythatemphasizespublic

discourseandcitizenengagement.Let’snotconfusecivicengagementwith

notionsofso-calleddirectdemocracywhereweallwatchtheeveningnewsand

voteonpublichangingsviaourmobiledevicesorinteractivetelevisions.

Citizensdon’thavethetime,interest,orexpertisetobecomeinformedonall

issues.Wewantreasonedopinion,notjustanyopinion.Westillneedlegislative

assembliestodebate,refine,andresolveissues.

Butsurelyamorecollaborativemodelofdemocracy—perhapsonethat

rewardsparticipationsuchastheminingfunction—couldencouragecitizens’

engagementandlearningaboutissues,whileatthesametimeinvigoratingthe

publicsectorwiththekeenreasoningthenationcancollectivelyoffer.Couldwe

createaculturewherepeopleareturnedonbythedemocraticprocess,notturned

offbytheirrepresentatives’abuseoftheirseats?

Whyhasthisnotoccurredtodate?Themainproblemisnotatechnological

one.Mostpoliticians,regardlessofpoliticalstripe,seemtocaremoreabout

winningelectionsthanaboutsolvingthecrisisoflegitimacythroughcitizen

engagement.

Let’sstartwiththebasics.Themostfundamentalprocessforrepresentative

democracyistheelection.Votingistheright(andinsomecountries,like

Belgium,theresponsibility)ofalleligiblecitizensinademocracy.Yetaround

theworldelectionsaredeeplyflawed.Corruptofficialstamperwithresultsor

outrightrigthem.Votingcanbesuppressedusingeverythingfromlackofaccess

tobriberyandintimidation.Manipulatingelectionsisacomplexbusinessbutit’s

donealmosteverywhere.Couldblockchaintechnologieshelpimprovethevoting

process?

Forallourtechnologicaladvances,themechanicsofvotinginelectionshave

remainedlargelyunchangedforhundredsofyears.Inmanypartsoftheworld,to

castyourvoteyougotoapollingstation,identifyyourself,markapaperballot,

putitinasecuredbox,andwaitforhumanbeingstocounttheballots.

Electronicvoting(e-voting)isatermforvotingwiththeaidofany

electronicsystem.E-votinghas,inmanycases,provedasunreliableasmanually

talliedvotes.E-votingtodaysuffersfromthreeproblems:attacksonthesoftware

andhardware,mistakesorbugsinthecoding,andhumanerror.In2004,avoting

machineaidinginthegeneralelectioninNorthCarolinawasaccidentallysetto

storeonly3,000votes.Itirrevocablylost4,438votesinaracethatwasdecied

byadifferenceofonly2,287.

BLOCKCHAINVOTING

Howmightvotingontheblockchainwork?Imaginetheboardofelections

creatingdigital“wallets”foreachcandidateorchoice,withapprovedvoters

allocatedonetokenorcoineachforeachopenseat.Citizensvoteanonymously

throughtheirpersonalavatarbysendingtheir“coin”tothewalletoftheirchosen

candidate.Theblockchainrecordsandconfirmsthetransaction.Whoeverends

upwiththemostcoinswins.

Somehavetriedtosolvetheproblemoftrustbyusingend-to-endauditable

votingsystems.Votesaretypicallymadeviakiosk,whichproducesa

cryptographicallyauthenticatedpaperrecordoftheballotbutallowsvotestobe

countedelectronically.

CommitCoinusescryptographicproof-of-worksystemstoproveamessage

wassentatacertaindate.Theinventors,JeremyClarkandAleksEssex,saywe

canuseittoprovetheintegrityofelectiondatabeforetheevent,asameansof

“carbondatingcommitments,”providingabaselinetocounteractfraudand

error.

End-to-EndE-VotingSystems

Citizensaremakingadvancesallthetime.In2015,academicsfromtheNational

andKapodistrianUniversityofAthenspublishedapaperintroducingDEMOS,a

newend-to-end(E2E)e-votingsystemverifiableinthestandardmodel,without

relianceonsetupassumptionsoraccesstoa“randomnessbeacon.”

Itusesa

distributedpublicledgerliketheblockchaintocreateadigitalballotboxthat

citizenscanusetovotefromanywhereintheworld.

AnE2Everifiableelectiondetectselectionauthoritieswhotryto

misrepresentoutcomes.Voterscastballotsinexchangeforreceiptsthatallow

themtoverifythat(a)theirvotewascastasintended;(b)itwasrecordedasit

wascast;and(c)itwascountedasitwasrecorded.Anexternalthirdpartycould

verifytheelectionresults.Votersstillmustacceptsetupassumptionsandtakea

leapoffaithontheelectionresults.

WithDEMOS,thevotingsystemgeneratesaseriesofrandomized

numbers.

Votersgettwosetsofnumbers,orkeys:onecorrespondingtothem,

andonetotheirpreferredcandidate.Aftertheencryptedvoteiscast,it’ssent

acrossmultipleservers.Resultsarepublishedtoabulletinboardpublicly

displayingalltheinformationrelatedtotheelection.

NeutralVotingBlocs

InAustralia,anorganizationcalledtheNeutralVotingBloc(NVB)isusing

votingontheblockchaintorevolutionizedemocracyinanotherwayentirely.

Theyhaveauniqueapproachtogovernment,andit’soptimistic:“Webelievethe

bestwaytofixpoliticsistoparticipateourselves.”

FounderMaxKayedescribesNVBasa“politicalapp”whereinterested

citizenscanregistertheiropinionsonpolicyissuesby“voting”onthe

blockchain.Oncethetimeisup,thefinaltallyinstructselectedofficialsonhow

tovoteingovernmentalproceedings.Whenasked,whyareyouusingthe

blockchain?MaxKayereplied,“Becauseweintendtofacilitateavarietyof

parties,someofthemwillnecessarilydisagreestrongly.Tomaintainintegritywe

needeachpartytobeabletoindependentlyverifythevotingrecord,andeach

vote.”Furthermore,Kayesuggeststhereareanticensorshipproperties,and

immutability.Hesaid,“TheonlyelectronicstructureontheplanetI’mawareof

thatcandothisisthebitcoinnetwork.(Althoughthereareotherblockchains,

theyarenotimmutableenoughbecausetheirhash-ratesaresolow).”

ProtectingtheVoters

Voterintimidationcantakeaviolentturn.InZimbabwe,thepartyopposing

RobertMugabewithdrewfromtheelectionwhencoercionfromsupporting

militiashadbecometoolethal.Theelectionswerecarriedoutanyway—Mugabe

won.Whiletechnologicaladvancesalwayscomewithpeoplewhoexploitthem

totheirownadvantage,somearebeginningtosaythatblockchaintechnology

coulderadicatecorruptioninplacessuchasAsia.

InJuly2014,duringoneofthemostcontestedpresidentialelectionsin

Indonesianhistory,ananonymousgroupofsevenhundredhackerscreatedan

organizationcalledKawalPemilu,or“ProtecttheVote.”Itsmissionwasto

publiclytallyelectionballotsonlinetoletvotersverifyresultsateachpolling

station.Theprinciplesofdecentralization,transparency,andindividual

anonymitycombinedtowardoffmaliciouscyberattacksandensureafairer

election.

“Docorruptgovernmentswanttokeepthemselveshonest?”

askedAnson

Zeall,CEOofCoinPip,acompanyspecializinginsendingfiatcurrenciesacross

internationalboundariesusingtheblockchain.Hequestionswhethereveryone

embracesadvancesinvoting,andwhetherpoliticiansactuallywantfair

elections.Toothers,e-votingseemslikeanunnecessaryorhastyleapforward.

Wearguethatmanyoftheseissuesbelongtotherealmofimplementation,not

design.

Theredesignofourelectoralandpoliticalsystemswilllikelyinfluencemore

fundamentalissueswithvotingindemocraticelections.ComparevoterIDfraud

withothermoreinsidiousfactors.AcomprehensiveinvestigationofvoterID

fraudintheUnitedStatesin2014foundthirty-oneincidents,including

prosecutionsandcredibleallegations,infederal,state,andmunicipalelections—

since2000.

Inthattime,morethanonebillionballotswerecastingeneraland

primaryelectionsalone.

InthefourstateswiththeharshestIDlaws,morethanthreethousandvotes

werepositivelyrejectedforlackofproperID.

Thisdoesn’tincludethosewho

didn’tbothertotryatall—andthatisamuchbiggerproblem.Whiletheirmodel

ofdemocracyisheraldedaroundtheworld,mostAmericansdon’tvotein

elections,citingreasonslike“nothingevergetsdone,”“politicsissocorrupt,”

and“thereisnodifferencebetweenthechoices.”

Weexpectblockchain

technologytohavesomeinnovativeapproachestotheseproblems,too.

Withtimeanddevelopment,blockchaintechnologymightbetheimpetus

thatallowse-votingtotransformdemocraticelectionsandinstitutionsby

effectivelyandreliablybringingthemintovoters’hands.

ALTERNATIVEMODELSOFPOLITICSANDJUSTICE

Iftheblockchaincouldenableamoreefficient,responsivegovernmentand

improvehowdemocracyisadministeredthroughnewvotingprocedures,could

italsocatalyzenewpoliticalprocessesaswell?

Forsomesupportersofnext-generationgovernment,theultimateaimof

electoralreformistoenableasystemof“liquiddemocracy.”EduardoRobles

Elvira,CTOofAgoraVoting,isonesuchfan.Hedescribesliquiddemocracyas

combiningthebestpartsofdirectdemocracy(likethesortpracticedinancient

Athens)withtoday’srepresentativedemocracies,whichaskverylittleoftheir

electorates.

Liquiddemocracy,alsocalleddelegativedemocracy,allowscitizensthe

ultimateincustomizationandpersonalizationofthedemocraticexperience.In

RoblesElvira’swords,inaliquiddemocracy“youcanchooseyourlevelof

participationatanypointintime.”

Yourinputisalwayswelcome,butnot

requiredtokeepthecountryrunning.

Voterscandelegatevotingauthoritytomultiplerepresentativesdelineated

acrossanarrayoftopics.

Referendaarethenheldfrequentlyandcategorized

bytopic,indicatingwhichproxy(ifany)shouldbepromptedtocasttheirvote

ontheissue.Thisenablesasysteminwhichvoterscanselectmanytrusted

expertsoradviserstovoteontheirbehalf.Underlyingthisideologyisthebelief

thatnooneperson(orparty)hasthefull,rightanswertoeveryquestion.In

representativedemocraciesthisaxiomisoftenbothassumedandignored.

RoblesElviraisworkingwithgovernmentstobuild“ahighlydistributed,

uniquelogofeventsreallygoodatsolvingdistributeddenial-of-service(DDOS)

attacks.”Blockchaintechnologyenablesthis.Hesaid,“Itisverydifficultto

createasecure,distributedsystemandtheblockchainallowsustodothis...

andit’snotjustthatit’sdistributed,butthatit’sdistributedinasecureway.This

isreallyimportantandcanbeusefulforalotofapplications;e-votingisjustone

ofthem.”Hiscompany,AgoraVoting,providesthetechnologicalinfrastructure

neededtoconductauditable,transparent,andverifiablee-elections.“Withtop-

notchcryptographictechnology,humansbecometheweakestlinkinthesecurity

chain.”

Spain’santiausteritypartyPodemos(translatedto“WeCan”)usesAgora

Votingtoholditsprimaryelections.Withtheparty’scommitmentto

participatorydemocracycameacommitmenttotransparency,anideological

shiftinSpainandelsewhereconsistentwiththeoneunderpinningdistributed

technologies.

RoblesElviraseessomelimitations,too.Tomaximizesecurityand

anonymity,ausercurrentlyneedsaccesstothewholeblockchain,abehemothof

afile.Sizemakesitdifficulttoaccess(especiallyonamobile)anddecidedly

user-unfriendly.Still,thetechnologyisalwaysevolvinganddesignsareever

improving.“Weareatthebeginningofe-voting,”saidRoblesElvira.

The

technologyispliable.Undoubtedly,itsbestapplicationsareyettocome.

DisputeResolution

Somelegaldisputesarebestleftoutofthecourts.We’veseenhowsmart

contractscanenabledecentralized,independent,autonomousadjudicationof

commercialdisputes.Smartcontractsareindifferenttonotionsoffairnessor

justice,however,andunabletoreconcileconflictingversionsoffacts.Even

morerevolutionaryforadjudicationthanaverifiablerecordofevidence,the

blockchaincanbetheplatformforP2Pdisputeresolution.Inthismodel,ajury

ofhundredsorthousandsofyourpeerscouldweighintoeffectively,asPamela

MorganofEmpoweredLawsaid,“crowdsourcejustice.”

Random-SampleElections

Anotherdemocraticmodelenabledbyblockchain-stylegovernanceisrandom-

sampleelections.Votersselectedatrandomwouldreceiveaballotinthemail

anddirectionstoWebsiteswithcandidateinformationandstatementsfrom

interestedparties.Anyonemayrequestaballot,butitwillnotbecounted,and

willappearindistinguishabletoitsvalidcounterpartstoallbuttherequesting

voter.Thesecanbesoldtoavotebuyer,buttheywouldneverknowifthatvote

counted.Asthesevotesarebelievedmorelikelytobesoldthantheircountable

counterparts,itmakescoercionimpracticallycostly.DavidChaum,inventorof

theconcept,saidrandom-samplepollingcouldproducemorerepresentativeand

reliableresultsthanelectionstodayregularlyachieve.

PredictionMarkets

ThecompanyAugurisusingtheblockchaintoaggregatemanysmallwagers

aboutfutureeventsintopowerfulpredictivemodels.Withtherightapplication,

itcouldhelpcreatecollaborativedemocracy.Governmentscoulduseprediction

marketstoengagecitizensinhelpingbetterunderstandfuturescenarios,

enablinggovernmentstomakebetterpolicychoices.

Ethereum’sVitalikButerindiscussesanalternativemodelofpoliticallife

calledfutarchy.

ConceivedbyeconomistRobinHanson,itstenetscanbe

neatlysummarizedas“voteforvalues,butbetonbeliefs.”Citizenselecttheir

democraticrepresentativesinatwo-stageprocess:First,picksomemetricto

determinetheircountry’ssuccess(likeliteracyorunemploymentrate).Then,use

predictionmarketstoselectgovernmentpoliciesdesignedtooptimizethe

electedmetric.

Augur’sstyleofpredictionmakingcouldengagecitizensinmakingsmall

choicesthatcontributetonationaldiscussionsofpolicy,eventuallyshapingthe

futureoftheirowndemocracy.

BlockchainJudiciary

Theblockchaincanalsotransformourjudiciary.Combiningtheconceptsof

transparency,crowdsourcing,andonlinecitizenparticipation—overablockchain

—wecanenvisionreintroducingconceptsofancientAtheniandemocracyinto

thetwenty-firstcentury.

CrowdJury

lookstotransformthejusticesystemby

puttingseveraljudicialprocessesonline,usingbothcrowdsourcingandthe

blockchain,includingfilingachargeorcomplaint,gatheringandvettingof

evidence,engagingcitizensinopentrialsonlineandasonlinejurors,andissuing

averdict.Thinktransparentprocesseswithcrowdsourceddiscovery,

crowdsourcedanalysis,andcrowdsourceddecisionmakingandpresto—youget

anaccurateoutcomeinamuchshortertimeframeandatvastlyreducedcost.

Theprocess

startswiththereportingonlineofasuspectedcivilorcriminal

wrongdoing(e.g.,apublicofficialsuspectedofreceivingbribes)andinviting

potentialwitnessestoprovideevidence,andcombininginformationfrom

multiplesources.Theoriginalcomplaintorclaim,aswellasalltheevidence,

wouldbecryptographicallystoredviatheblockchaintoensurethatitremainson

recordandisnottamperedwith.

Onceitisfiled,relativelysmall(ninetotwelvepeople)groupsofvolunteers

self-selectedbasedonrequiredexpertisewouldanalyzethefactsanddetermine

whetherthereisvaliditytogototrial.Attrial,therewouldbetwopossible

paths.First,thenamed“wrongdoer”pleadsguiltyandproposesrestoration

(whichmayormaynotbeacceptedbyajury)orthecomplaintproceedsto

onlinetrialwithamassivejury.JustasinAthens,whereanycitizenoverthirty

couldapplyforjuryforanygivenperiod(butnotforaspecificcase),individuals

willapplyforjurieswithfinalselectionbyarandomizationdevice,justas

AthenianjurorswereselectedbyakleroterioninthefourthcenturyBC.

Asa

result,thereisnobiasinthedistributionofjurorstospecificcases.Thetrialand

alltheevidencearebroadcastonlineinanopen-court-likemodel.Anyonecan

“attend”andaskquestionsofthedefendant,butonlyjurorsvotefortheverdict

viaanonlinevote.

Let’sstartwithconflictadjudicationinlow-valuedisputesandresolving

issuesinglobalcommunitiesacrossjurisdictionallines,forexamplesocial

networks.TheU.K.CivilJusticeCouncilrecentlylookedatonlinemodels

worldwidetorecommendonlinedisputeresolution.

Mostoftheearlymodels

dependuponuseofjudgesorotherexpertadjudicatorsatsomestagesinthe

onlineprocess.Otherprocessesinplacerelyuponotheronlineparticipantsto

calloutandaddressinappropriatebehavioronlinesuchasdefamatoryfeedback

(e.g.,eBay’ssubsidiaryintheNetherlandsMarktplaats’IndependentFeedback

Review)orcheatingatonlinegames(e.g.,likeValve’sOverwatch,whichallows

qualifiedmembersofthecommunitytoreviewreportsofdisruptivebehavior

andapplytemporarybans,ifappropriate.)

Thisisafarcryfrommobjustice.It’sthe“wisdomofthecrowd”appliedto

manymorejudicialprocesseswithbeneficialresults.

ENGAGINGCITIZENSTOSOLVEBIGPROBLEMS

Mostpeoplewhobelieveinscienceunderstandthathumancarbonemissionsare

warmingtheatmosphere.Thisclimatechangeisdangeroustooursandmany

otherlife-formsontheplanet.Governments,companies,andNGOsworkingon

reducingcarbontendtoagreethatso-calledcarbontradingisanenvironmentally

effectiveandeconomicallysensibleapproachtoloweringemissions.

Onepolicyiscalled“capandtrade.”Aregulatorybodysetsa“cap”orlimit

oncarbonemissionsandlowersitovertimetoreducetheamountofpollutants

releasedintotheatmosphere.The“trade”representsamarketforcarbon

allowances,helpingcompaniesandotherorganizationstocomplywiththeir

allocatedlimit.AccordingtotheEnvironmentalDefenseFund,“Thelessthey

emit,thelesstheypay,soitisintheireconomicincentivetopolluteless.”

TodaytheEuropeanUnion’smostdevelopednationshavecap-and-trade

exchanges.California,Ontario,andQuebecagreedontheMontrealProtocol,

advocatingforaglobalexchange.Officialsatnation,state,city,andenterprise

levelscouldallocatecap-and-tradecreditstobalancesetallowances.Atthesame

time,blockchain-basedreputationsystemscouldratethekilowatt-hoursof

energyproviderstothegridaccordingtostandardsofsustainablegreenhousegas

reduction.Forexample,thesystemcouldtagenergysourcedfromcoalwith

highercapdebitsandrenewableslikesolarascredits.Blockchaincanhelp

automatethecap-and-tradesystemonanindustrialscale.Efficientpricing

algorithmscomputecreditsanddebitsinrealtime,andgreenorganizations

captureandtracktheircarboncreditsontheledgerandrollthemintoan

exchange.

Whatifwecreatedacap-and-tradesystemforpeople?Surelyweneedmore

thanourinstitutionstochangetheirbehavior!Personalcarbontradingwould

workthroughtheInternetofThings.Sensors,detectors,andinstrumentation

wouldmeasureyourwaterheater,dishwasher,andhouseholdthermostatinreal

timeandinformyouofyourcarboncreditsbalance.Atthesametime,youcould

earncreditsbyactinginpractical,sustainableways.Ifyouaddedanarrayof

solarpanelstoyourroof,youwouldearncreditsbyreturningexcessenergyto

thegrid.

Couldthiscreatenewsourcesofannualincomeforpeople?Afterall,the

poorandhomelessarelowcarbonusers.Bybikingtowork,youcouldsave

creditsthatyourhotwaterheatercouldspend:“Hey,dishwasher—mypersonal

cap-and-tradewatchindicateswecanaffordtorunonfullwashandthirty-

minutedrycycle.”Watersensorsinthewashercouldmanagewaterusagebased

onanacceptablelevelofparticulatedensity,dampnesssensorsinthedryercould

turnthedryeroffwhentheclotheshavereachedanacceptablelevelofdryness,

andthebuilding’sHVACsystemcouldharnesstheexcessheat.

WIELDINGTOOLSOFTWENTY-FIRST-CENTURYDEMOCRACY

Asaglobal,distributed,andprogrammableledgerthatissecure,designedfor

privacy,andenrichedwithincentivesystems,blockchaintechnologylendsitself

tothedevelopmentofnewdemocratictoolssuchas:

DigitalBrainstorming:Bringingtogetherpolicyofficialsandcitizensto

havereal-time,moderated,onlinebrainstormingsessionstoidentifynewpolicy

issuesorneeds.Consensusisthenachievedthroughone-token,one-votesystems

thatcanhelpachievethoughtfuldiscussionandmakeitharderfordisrupters,

trolls,andsaboteurstocausedamage.

Challenges:Onlinecontestswithapanelofjudges.Thinkofpreblockchain

modelsliketheGoldcorpChallenge(mentionedearlier),theXPrize,orthe

numerousinnovationchallengesconductedbymanyWesterngovernments.The

goalofchallengesistoengagecitizensininnovationandthecreationofpublic

value.

OnlineCitizenJuriesandPanels:Citizenschosenatrandomserveas

policyjurorsoradvisersonatopic.ThejuryusestheInternettoshare

information,askquestions,discussissues,andhearevidence.Blockchain

reputationsystemshelpquestionerstoknowthebackgroundandreputationof

thejuryandpanelmembers.Decisionsandrecordsarerecordedonthe

blockchain.

DeliberativePolling:Thisgivescitizenstheresourcestolearnaboutand

reflectupontheissuesinacollaborativeanddeliberativefashion.Thiswould

combinesmallgroupdiscussionsontheInternetwithscientific,random

samplingtocontributemoreinformedpublicinputinpolicymakingthaninstant

pollingcanprovide.

ScenarioPlanning:Buildingscenarioswithsimulationandmodeling

softwaretoprojectfuturepolicyneedsandtounderstandthelong-term

consequencesofdecisions.Politicians,bureaucrats,andcitizenscouldassessthe

potentialimpactsonarangeoffactors,rangingfromhealth,totheenvironment,

totheeconomy.

PredictionMarkets:AsweexplainedinthecaseofAugur,thereare

countlessopportunitiestousepredictionmarketsfortradingtheoutcomeof

events.Governmentscanusethemtogaininsightintomanysubstantive

questions:Whenwillthebridgeactuallybebuilt?Whatwillbethe

unemploymentlevelintwelvemonths?WilltherebeaNationalPartyprime

ministerafterthenextelection—anactualquestionfromaniPredictmarketin

NewZealand.

Blockchaintechnologiescouldsuperchargeallofthesetools.Tobegin,

contributionsfromcitizenscouldbeprivate,openingupthepossibilitiesof

engagement.Thisisbadforrepressivegovernmentsbutgoodfordemocracyas

itmakesitmoredifficultforgovernmentauthoritiestocensor,suppress,and

trackdownopposition.Atthesametime,asdescribedearlierinthecaseof

Blockapedia,blockchain-basedreputationsystemscouldenhancethequalityof

discussions,reducethenumberoftrollsandsaboteurs,andensurethatall

commentsareaccuratelyandindeliblyrecorded.Whenthereiscompensationfor

winnersorothercontributors,settlementscouldbemuchmoregranularand

instantthroughdigitalcurrencies.Varioussmartcontractscouldbeconstructed

withcitizensandgroupstobetterclarifytheroleofeveryoneintheprocess.

MelanieSwan,founderoftheInstituteforBlockchainStudies,arguesthat

blockchaintechnologymighthaveamaturingimpactonhowsocietyapproaches

topicslikegovernance,independence,andcivicduty.“Itmightseemharderto

letgoofcentralizedauthorityinmattersofgovernmentandeconomicsas

opposedtocultureandinformation,butthereisnoreasonthatsocialmaturity

couldnotdevelopsimilarlyinthiscontext.”

Clearly,thenext-generationInternetprovidesprofoundnewopportunities.

Themainchallengesarenottechnological.Onecautionaryexample:Obama’s

2008campaigncreatedanexpansiveInternetplatform,MyBarackObama.com,

thatgavesupporterstoolstoorganizethemselves,createcommunities,raise

money,andinducepeoplenotonlytovotebuttogetinvolvedintheObama

campaign.Whatemergedwasanunprecedentedforce:thirteenmillion

supportersconnectedtooneanotherovertheInternet,andself-organizedto

buildthirty-fivethousandcommunitiesofpeoplewithcommoninterests.When

youngpeoplechanted“YesWeCan,”itwasn’tjustasloganofhope;itwasan

affirmationofcollectivepower.

However,in2012theObamacampaignshiftedfromcitizenengagementto

“bigdata,”replacing“YesWeCan”with“WeKnowYou.”Ituseddatatoswing

votersandtargetsupportersforfunds.Thecampaignwontheelection,but

relegatedcitizenstoconsumptionofitsmessages.Thebigdatastrategyhad

fewerrisksthanastrategyofself-organizingcommunities.

Duringbothhistermsthepresidentdidtakeimportantstepstoengage

citizens,primarilythrough“Challenges,”whichareelaboratecontestsfor

innovativeideas.Butinhiscriticalsecondcampaign,Obamafailedtoengage

citizensandmissedahistoricopportunitytostrengthengovernmentlegitimacy.

Intheend,evenPresidentObama,whohadbeencalled“TheFirstInternet

President,”tooktheexpedientroutetopower,usingsocialmediatobroadcast

messagesandraisefundsthroughdata-enrichedtargetedadvertisingonline.

IfnottheInternetPresident,thenwho?

Thereisaroleforeveryoneinmovinggovernmentanddemocracyonto

blockchains.First,thereareunlimitedopportunitiesforeliminatingredundancy

andwastedtime,votingandparticipatinginnewdemocraticprocesses,serving

asajuror,earningenergycredits,payingtaxesandreceivingpublicservices,and

seeingwhereone’staxdollarsaregoingandhowrepresentativesarevoting.

Electedrepresentativesneedtostepupandshowleadershipindesigningand

implementingsmartcontracts.Ifyouhaveintegrity,whynotencouragethe

creationofblockchainreputationsystems?“Votershaveshortmemories,”

said

AndreasAntonopoulos.Createbettertransparency,whetheryouareajudge,

attorney,policeofficer,orparliamentarian.Civilservantsandgovernment

employeescouldusesensorsandcamerastotrackpublicassetsandinventoryon

theblockchain,prioritizeinfrastructurerepairs,andallocateresources.Ifyou’re

ayoungperson,don’tgiveupondemocracy.Itmaybebrokenbutit’sfixable.

Focusoncampaignfinancingasastartingplaceforblockchaintransparency,as

bigmoneyiscurrentlythemostfundamentalproblem.Ifyou’reagovernment

contractor,usesmartcontractstocleanupgraftandwasteandevidenceyour

superiorperformance.Thepossibilitiesabound.

Clearlytherewillbeastruggletobringaboutchange,butcitizensofthe

world,unite!Youhaveeverythingtogainthroughtheblockchain!

CHAPTER9



FREEINGCULTUREONTHEBLOCKCHAIN:

MUSICTOOUREARS

twasn’tyourtypicalyearling’sbirthdayparty.Thecelebrationtookplaceat

theRoundHouseanhouroutsideLondon,inamassivebarncompletewith

sound-reactiveLEDtree,abouncycastle,andabuffetfitforHenryVIII.The

crowdwaseclectic:a“contact”juggler,twodozentoddlers,theirparents,

neighbors,musicians,andahandfulofblockchaindevelopers.TherewasVinay

Gupta,aScottish-Indianengineerbestknownforinventingthehexayurt,asmall

disasterreliefshelter.Guptaisnowexplainer-in-chiefwhenitcomesto

communicatingblockchaintechnologytothemasses.TherewasalsoPaul

Pacifico,CEOoftheFeaturedArtistsCoalition.Afteracareerinbanking,

Pacificoisnowfightingfortherightsofmusicians.And,ofcourse,therewas

ourhost,ImogenHeap,anaccomplishedcomposerandmusician,voted

“inspirationalartistoftheyear”byreadersofMusicWeek,

andthemotherof

one-year-oldScout.

“IwanttoknowthatthestuffI’mmakingcouldbeworthsomethingto

Scoutsomeday,”Heaptoldus.Shewasexpressingherdeepconcernsaboutthe

musicindustry.“It’ssofragmented;there’ssolittleleadership,andthere’sso

muchnegativityaroundthebusinesssideofit,”shesaid.“Everythingistopsy-

turvy.It’sallupsidedown.Theartistsareattheendofthefoodchain.Itjust

doesn’tmakesense.Musiciseverywhere,allthetime.It’sonourphones,it’sin

ourtaxis,it’severywhere.Buttheartistsaregettinglessandless.”

Andthereinliestherub.TheInternetisamarvelousmuse,bothamediumof

creativityandachannelforfreespeech.There’snoshortageofideasforwhat

talentedartists,designers,andcoders—andtheirmanyfans—candowithone

anotherontheWorldWideWeb.Noristhereadearthofwaystomakemoney

fromallthiscreativecollaboration.Creativeindustriessuchasmusicpublishing

andrecordinghavebeentappingnewrevenuestreamslikedigitaldownloads

andstreamingaudio.Theproblemisthat,witheachnewintermediary,theartists

getasmallercutandhavelittlesayinthematter.DavidByrneofTalkingHeads

famesummedupthesituationinanop-edpiece:“Itseemstomethatthewhole

modelisunsustainableasameansofsupportingcreativeworkofanykind.Not

justmusic.TheinevitableresultwouldseemtobethattheInternetwillsuckthe

creativecontentoutofthewholeworlduntilnothingisleft.”

Thischapterlooksatwaysthatblockchaintechnologiesareputtingartistsat

thecenterofthemodelsotheycannotonly“havetheircake,”thatis,exercise

theirfreedomofexpression,butalso“eatit,too,”maximizingthevalueoftheir

moralandmaterialinterestsintheirintellectualproperty.Inotherwords,to

restoretheirrights.Nomorebig,greedyintermediary,nobiggovernment

censors.Here,wesurveytheculturallandscape—art,journalism,andeducation

—wherebasichumanrightsandlivelihoodshanginthebalance.

FAIRTRADEMUSIC:FROMSTREAMINGMUSICTOMETERING

RIGHTS

“IfScouteverdidendupbeingamusician,howonearthwouldshemake

money?Shewouldn’tbeableto,”saidImogenHeapofherdaughter’smusic

career,wereitdependentonthecurrentmusicindustrymodel.“Weneed

somethingreallysimpleandcore,somethingtrustworthy,forpeopletofeelthat

musicissomethingtheycandoforaliving.”

PaulPacificoagreed:“Wewanta

musicindustrythatreflectsthecultural,technological,social,andcommercial

senseofourtimesandallowsforasustainableandviablefutureforcreatorsand

consumersalike.”

HeaphasteamedupwithPacifico,VinayGupta,andothers

tocreatethisnewmusicecosystem.

Iftherewereapredictionmarketforinnovations,we’dbetonTeamHeap.In

2009,shebecamethefirstwomantowinaGrammysoloforengineeringher

ownalbum,Ellipse.ShetookallherTwitterfollowerstotheawardceremonyby

wearingwhathasbecomeknownasthe“Twitterdress.”Heroutfit,designedby

MoritzWaldemeyer,featuredanLEDzipperthatstreamedherfans’tweets

aroundhershoulders.In2013,Heapkick-startedthenonprofitMi.Mutoinvent

amusicalglovesystem.Itcombinesmappingsoftwarewithmotiondetection

sensorssothatperformerscancontrollights,music,andvideowithuser-

customizedgestures.Theinventionwontopprizeatthe2015BerlinAwardsfor

WearableIT/FashionTech.Theglovesarequicklycatchingon.PopstarAriana

GrandepostedthismessageonYouTubewithhervideocoverofHeap’s“Hide

andSeek”:“wanttothankmyidol@imogenheapforallowingmetousethe

Mimuglovesonmyfirsteverworldtour.”

IfanyonedoubtsHeap’sabilityto

rallyacommunityaroundnewtechnology,thinkagain.

“Wereallyknowwhatwewant,”Heapsaid.“We’renotabunchofairheads

wholiketosmokepotinourlivingroomsandmakemusic.We’rehardworking

entrepreneurs.”

Heapviewsblockchaintechnologyasanewplatformfor

creatorsofintellectualpropertytogetfairvalueforit.Smartcontractsin

particularcouldeliminatethemagnitudeofindustrycomplexity,simplifyinga

mission-criticalroleofmusiclabelsinthisecosystem.

RubeGoldbergStrikesAgain:ComplexityintheMusicBusiness

ToparaphraseTalkingHeads,howdidwegethere?Howdoweworkthis?

It

startswithabasicproblemforartists—thattheysignedcontractsdraftedforthe

vinylage,whenhugeanalogproductionanddistributioncostsstoodbetween

recordingartistsandtheirpotentialconsumers.Heaptoldus,“WhenIfirstfound

arecordlabel,IthinkImanagedtogetsomethinglikefifteenpercent.Mylast

recorddealafewyearsago,Igotmaybenineteenpercent.Ifpeoplearelucky,

theymightgetmorenow.”

Artistsmayhaveassignedtheirrightstoalabelfor

thefulltermofcopyright.IntheStates,that’seitherninety-fiveyearsorthelife

oftheartistplusseventyyears.Imaginealltheunforeseeninnovationsthata

contractwouldhavetocovertokeepthedealfairforartistsandtheirheirs.

Initially,thelabelsweresmall,radiowasking,therecordstorewasqueen,

andartistandrepertoirepersonnelnotonlyscoutedfornewtalentbutalso

oversawtheirartisticdevelopment.Inthelasttwenty-fiveyears,theindustryhas

consolidatedfromthousandsoflabelsdowntothreeglobalsuperpowers—Sony

MusicEntertainment,Vivendi’sUniversalMusic,andWarnerMusicGroup—

andafewhundredindielabels.Thesethreemajorshaveacombined15percent

stakeinSpotify,themostpopularandlucrativestreamingmusicservice.

So

theywillgetanextracashinfusionifandwhenSpotifygoespublic.Applehas

becometheworld’slargestmusicretailer,andLiveNationtheworld’slargest

liveentertainmentcompany.

Socontrolofmusiccopyrightisconcentratedinthefew.Thelabelsandthe

tourpromotioncompanieshavestartedaskingfor360-degreedealsfromartists.

Thatmeansgettingacutofalltherevenuesanartistgenerates—publishing

rightstotheunderlyingcomposition,usagerightstothesoundrecording,

performancerightswhentheartistgoesontour,potentiallyevenmerchandise

andsponsorshiprights—regardlessofwhethertheyinvestedinthecultivationof

thoserights.

Withconsolidationcomessystemsintegration,andthat’snevereasy.Each

conglomeratehasitsownprocessofaccountinganditsownversionofacontract

andaroyaltystatement,makingside-by-sidecomparisonsachallenge.“Wehave

abigprobleminthattheindustryisveryfragmented.Withallofitsdifferent

platforms,it’sabitofanightmare,”Heapsaid.

Thesesystemsmust

accommodateinnovationinproduction,format,distribution,andcontextof

usage.Butrarelyisanelementimmediatelyoutmoded,andsoeverypartymust

maintaintwoormoremodelsconcurrently,themostobvioustwobeingthe

physicalandthedigital.

Toaddtothecomplexity,therearemanymembersofthesupplychain,not

justthepublishersandtheperformancerightsorganizations(PROs)—

organizationsthatmonitorpublicperformancesofmusicandcollect

performanceroyaltiessuchasthenot-for-profitAmericanSocietyofComposers,

AuthorsandPublishers(ASCAP),not-for-profitBroadcastMusic,Inc.(BMI),

andtheenterpriseformerlyknownastheSocietyofEuropeanStageAuthorsand

Composers(SESAC)—butalsotheproducersandthestudios,thevenues,the

concerttourorganizersandpromoters,thewholesalers,thedistributors,andthe

agents,eachwithitsowncontract,accounting,andreportingsystem.Theytake

theircutandpassalongtheremaindertotheartists’managersandagents.

Whatever’sleftgoestotheartiststhemselves,perthetermsoftheircontracts.

That’sright—theartististhelasttobepaid.Itcouldbesixtoeighteenmonths

beforethefirstroyaltycheckarrives,dependingonthetimingofthereleaseand

thelabel’saccountingcycle.

Finally,anentirelynewlayerofintermediaries—technologycompanieslike

YouTubeorSpotify—insertedthemselvesintothesupplychainbetweenartists

andlabels,slicingtheartists’pieceofthepieeventhinner.Let’slookat

streamingmusic.Spotifypaysonaveragebetween$0.006and$0.0084per

streamtorightsholders,usuallythelabels.

Thecalculationofthisinitial

paymentmayseemtransparentatfirst.Spotify’ssitestatesthatitpays70

percentofitsadvertisingandsubscriptionrevenuestorightsholders.Butwe

revieweditsforty-one-page“DigitalAudio/VideoDistributionAgreement”with

SonyUSAInc.,andthepayoutofsome$42.5millioninnonrecoupable

advancestoSonyartistsisanythingbutclear.Infact,thefirstparagraphofthe

agreementcallsforconfidentiality.ItappearsthatneitherSpotifynorSonycan

informSony’sartistsoftheimpactofthisagreementonartists’revenues.Rich

Bengloff,presidentoftheAmericanAssociationofIndependentMusic,said

that,inhisexperience,thelabelsdon’tusuallysharemoneynotdirectlytiedto

usage.

IndustryanalystMarkMulligansaid,“Artistsaregoingtofeelpainfor

atleastanotherfourtofiveyears,justastheydidinthefirstfourtofiveyears

afteriTuneslaunched.”

Sowhatvaluedothelabelsadd?Certainly,theyattempttomanagethis

complexity,policepiracy,andenforcerights.Forexample,UniversalMusic

PublishingGrouphaddedicatedathirdofitsworkforcetoroyaltyandcopyright

administrationinlocalmarketsaroundtheworld.

Universalrecentlydeployed

anartist’sportalthatallowsartiststopeekatthestatusoftheirroyaltiesandto

requestadvancesagainstfuturerevenuesfornofee.Theportalalsoprovides

“insightsintoSpotifyusage:howmanytimesasongstreams,whatkindsof

peoplearestreamingit,whatelseisonthoselisteners’playlists,andhow

specificsongsresonatewithcertainaudiences.”Universalhasdevotedsixteen

stafferstoupgradingtheportalandinterpretingdataforartists.

Thelabelsalso

havehugeteamsoflawyersandlobbyists.Theycanlaunchnewartistsglobally,

demandingtheirboilerplateterms,marketingthroughlocalforeignmedia,

distributingtheirmusicinforeignmarkets,licensingrightstoforeignpublishers,

supportinginternationaltours,andaggregatingalltherevenues.Thecostof

policingroyaltieshasincreasedwiththecomplexityofthebusiness—thatisa

costthatdirectlyaffectsartistseverywhere,becauseitfunctionslikeatax.

Smartcontractsontheblockchaincaneliminatethemagnitudeofthis

complexity,replacingamission-criticalroleofmusiclabelsinthisecosystem.

AccordingtoImogenHeap,“Ifyou’reacomputerprogram,apieceofsoftware,

adatabase...theseissuesdisappear,asit’sjustmathshalfthetime.Thisbit

goestothisperson...anditdoesn’ttakeayearortwotoreachtheartist,writer,

performer....It’sinstantbecauseit’sautomatedandverified.Ontopofthis,

culture-shiftingnewmusicdistributionservicesgatherreallyusefuldatafrom

artists’fans,whichcouldmassivelyhelpusbemoreefficientiftheartists

themselvescouldgettoit.”

That’sthefutureofmusicontheblockchain.

EmergenceofaNewMusicBusinessModel

Thecombinationofblockchain-basedplatformsandsmartcontracts—plusthe

artisticcommunity’sstandardsofinclusion,integrity,andtransparencyindeal

making,privacy,security,respectofrights,andfairexchangeofvalue—could

enableartistsandtheircollaboratorstoformanewmusicecosystem.

“Wouldn’titbeniceifIcouldjustdecidehowI’dlikemymusictobe

sharedorexperienced?”Heapasked.“Tosimplyuploadapieceofmusic,for

example,andallitsrelatedcontenttooneplaceonline,foralltotapintoand

derivefrom.Usagerights,ownership,theequivalentoftoday’slinernotes.

Video,latestbiography,”andallotherparties—notjustrecordlabels,music

publishers,andtourpromotersbutalsocorporationslookingforjingles,TV

producerslookingforsoundtracks,mobileserviceproviderslookingfor

ringtones,andthemanyfanslookingtodofanvideos—coulddecidewhetherto

agreetoHeap’stermsofuse.“Wouldn’titbeamazingtofeelthepresenceofthe

artist,thatiftheymakethatdecisionabouttheirmusic,it’sreallyfeltinareal

physicalsense,evenfromonedaytothenext?”shesaid.“Imaydecide,hey,it’s

mybirthdaytoday,allmymusicisforfreeor...ifyou’reundersixteenorover

sixty,it’sonme!Ortodivertallpaymentsduetometoarelieffund,withjusta

fewalterationsofwordinginthesmartcontract.”

That’sthegoalofdesigninganartist-centricmodelontheblockchain,nota

modelcenteredonmusiclabelsortechdistributors.Artistscouldproducemusic

andbepaidfairlyforthevaluetheycreate,andloversofmusiccouldconsume,

share,remix,andotherwiseenjoywhattheyloveandpayafairvalue.This

modelwouldn’texcludelabelsordigitaldistributors,buttheywouldbeequal

ratherthandominantmembersoftheecosystem.

Thenewmusicindustryisnotapipedream.InOctober2015,Heaplaunched

herfirstexperimentbyreleasinghersong“TinyHuman,”andallrelateddata—

theinstrumentalversion,sevenstereostems,frontcoverimage,musicvideo,

linernotesonmusicians,gear,credits,lyrics,acknowledgments,anduseful

links,andthestorybehindthesong—ontheInternet.

Thesedetailswould

increaseherdiscoverabilityontheInternet,thatis,tohelppotentialcollaborators

tofindher.

Heapinvitedfans,developers,andservicestouploadhersongtotheir

variousplatformsandtosharetheirworkaswell.Shegrantedthem

nonexclusiverightstocreateanImogenHeapartistprofile,providedthatthey

gaveherthelogindetailsandpermissionsafteruploadingherfilestotheir

systems.Iftheyexpectedrevenuestreams,thensheaskedthemtoprovide

paymentmodels,percentages,andamountssothatshecouldfactorthosedetails

intoheranalysisoftheexperiment.Finally,shewelcomeddonationstoher

bitcoinaddressandpromisedtodirecthalftheproceedstohercharitable

foundation,Mycelia,hernameforthisnewecosystem.Usagedataand

participantbehaviorwouldinformthenextstageofdevelopmentonthe

blockchain.

VariouscompaniesareworkingonitsdesignandcollaboratingwithHeap

andotherforward-thinkingmusicians.Thisnewecosystemhasanumberof

featuresthattheexistingindustrylacks:

ValueTemplatestoconstructdealsthatrespecttheartistasentrepreneurand

equalpartnerinanyventure,integraltovaluecreation.Good-byearchaicpaper

contractsthatperpetuateunfairbeginnings.“Nomoreclawingbackroyalty

percentages,”saidHeap.

InclusiveRoyaltiesthatdividerevenuesfairlyaccordingtoeachperson’s

contributiontothecreativeprocess,notonlycomposersandperformers,butalso

theotherartistsandengineers.Everyonecouldhaveanupsideinasmashhit,not

justthelabelsandthedistributors.

TransparentLedgersdistributedontheblockchainsothateveryonecould

seehowmuchrevenueasongwasgenerating,thetimingandmagnitudeofthe

revenuestreams,andwhowasgettingwhatpercentage.Nomorearchaicand

proprietarypaper-basedaccountingsystemstohidebehind.Separatetagsforthe

natureofrevenues,fromwork-made-for-hiretoroyaltyrevenues.Easy

accounting,easyauditing,easypaymentoftaxes.

Micrometering,Micromonetizingfunctionalitytostreamtherevenues,not

justthemusic.Ifthemusicweremetered,whereconsumersmademicro-or

picopaymentsperplay,theroyaltypaymentscouldbestreamedimmediatelyto

theartistsandcontributors.Nomorepaymentdelays,nomorebiannualor

quarterlyroyaltychecks,nomorecrypticroyaltystatements.Nomorehand-to-

mouthartists!BlockchaintheoristAndreasAntonopoulosgavethisexample:

“StreamiuminArgentinaisastreamingvideoservice.Itallowsvideoproducers

tochargethousandthsofapennyfordownloading,say,twohundred

millisecondsoflivestreamingvideo.Itusesmultisig[nature],time-locked

transactions,atomicity,andsumintegritytoimplementitsscheme.Producers

deliveronlythevideothathasactuallybeenpaidfor,andconsumerspayfor

onlythevideoactuallyconsumed.Theyautomaticallyrenegotiatethatcontract

fivetimesasecond.Ifeitherofthemdropsoutatanypointintime,thecontract

endsandtheycashinthemostadvantageoustransactionbetweenthem.”

RichDatabasesthatcaninterfacewithoneanotherandassociatethecore

copyrightedmaterial—lyrics,composition,andrecordings—withalltheir

metadata,thelinernotes,theartworkandphotographs,theindividualtracks,the

rightsthatthecomposerandtheperformerarewillingtolicense,thetermsof

licensing,contactinformation,andsoforth—inthedigitalledgerforalltosee.

Nomoreincompletedatabasesofrights.Rightsavailabilityatyourfingertips!

Rightsholderswouldbeeasytofind.

UsageDataAnalyticsinthehandsofartistsatlast,toattracttheright

advertisersandsponsors,organizetours,planpromotionsandcrowdfunding

resourcesandfuturecreativecollaborationswithotherartists.Themodelcould

capture“somuchofthislostdataaroundtheworld,likewhereareyourfans,

howoldarethey,whataretheyinterestedin,”saidHeap.“Withthatinformation,

wecouldreallytailor-maketours,wecouldconnectupwithbrandsand

initiativesthatresonatewithus,orpromoteartists,products,orcharitieswelove

andsupport.I’mnottalkingnamesande-mailaddressestypeofinfo,abitmore

zoomedoutbutstillvitallyusefuldata.Wecouldcross-referenceitwithother

bands’dataforallkindsofinterestingusesforfansandartistsalike!”

DigitalRightsManagement,thatis,ameansofmanagingdigitalrights,not

theanticonsumerDRMsoftwarewrapperthatwasallaboutrestrictingusage.

We’retalkingaboutthedeploymentofsmartcontractsthatactuallymanage

rightsandmaximizethevalueofpublishing,recording,performance,

merchandise,andallotherrights.Thisincludestermsofthird-partyengagement

forrecordlabelsanddistributionservices:labelsanddistributorscoulddecide

whethertooptintoanartist’stermsofuseandexpectationsforservice.Ifartists

don’twantadvertisingtointerruptthemusicexperience,thentheycanforbidit.

Iftheywantacertaincutofadrevenue,thentheycaninsistonit.Iftheywant

oneoftheselargefirmstohandlelicensing,distribution,andcopyright

enforcementincertainterritoriessuchasChina,thentheycandothat.Theycan

alsosettermlimits.Ifthefirmsdon’tdeliveracertainlevelofrevenue,thenthe

contractscanautomaticallyterminate.Artistsalsoneedautomatedsubsidiary

rightsmanagement,whereverpossibleordesired,whereprospectivelicensees

eitheracceptorrejecttheartist’stermsofuseandpayment.Thecontractitself

enforceseachdealandcannotifytheartistofanybreachesandterminations.

Auction/DynamicPricingMechanismstoexperimentwithpromotionsand

versioningofcontent,evenpegsubsidiaryrightsroyaltypercentagestothe

demandofasong.Forexample,ifconsumerdownloadsofasongspike,thenan

advertiserwholicensedthatsongforacommercialautomaticallyhastopay

morewhenthecommercialruns.

ReputationSystemthatcullsdatafromabitcoinaddress’stransaction

historyandsocialmedia,tocreateareputationscoreforthataddress.Artistswill

beabletoestablishtheirowncredibilityaswellasthatofprospectivepartnersin

dealmaking,whetheramongartistsascollaboratorsorbetweenartistsand

consumers,labels,merchants,advertisers,sponsors,licensees,andsoforth.

Usingmultisigsmartcontracts,artistscouldrefrainfromdoingdealswith

entitiesthatdon’tmeetcertainreputationalstandardsordon’thavenecessary

fundingintheiraccounts.

Thekeypointofthisnewfairmusicindustryisthattheartistsareatthe

centeroftheirownecosystem,notattheedgesofmanyothers.“Iseeaplacefor

SpotifyandYouTube.Iseeaplaceforcuration,andIseeaplaceforuser-

generatedcontent,”saidHeap.“Iseeaplaceforrecordcompaniesbecausewe

stillneedpeopletosiftthroughthehundredsofmillionsofhoursofmusic,or

billionsofbitsofmusicandartallovertheplanetbeingcreatedeveryday.”

Withsoftwaretemplates,theycanengagecreativecollaborators,thebigmusic

labels,thebigdistributors,andthemanysmallerintermediariesastheyseefiton

theblockchain.

TheSelf-LaunchedArtist:SignsoftheNewMusicParadigm

OneofImogenHeap’sfriends,ZoëKeating,Canadian-borncellistand

composer,hasalwayscontrolledherownmusic.Sheownsallherpublishing

rightsandthemasterstoherrecordings.Shecarefullyorchestratesherown

marketing,sales,licensing,anddistributionstrategy.Givenallthecomplexity

mentionedabove,we’rehugelyimpressed.“Anartistlikemecouldn’texist

withouttechnology.Icanjustrecordmusicinmybasementandreleaseitonthe

Internet,”KeatingtoldTheGuardian.Forher,theInternethasleveledthe

playingfieldforindependentartists,butherexperiencewiththebigonline

musicdistributorshasnotdifferedgreatlyfromImogenHeap’swiththe

traditionallabels.“Thisisnotjustanexcuseforservicestoreplicatethepayment

landscapesofthepast.It’snotanexcusetotakeadvantageofthosewithout

power,”saidKeating.“Corporationsdohavearesponsibilitynotjusttotheir

shareholdersbuttotheworldatlarge,andtoartists.”

KeatingwasalludingtothenewcontractthatGoogle’sYouTubepresented

toher.Itwaswrappedinnondisclosure.Forseveralyears,she’sdistributedher

musiconYouTubeandmonetizedthird-partyuploadsofhermaterialusing

ContentID,aprogramthatautomaticallyalertsrightsholderstoinstancesof

potentialcopyrightinfringement.Keatingwasn’tconcernedaboutpiracy,file

sharing,orroyalties.Toher,commercialstreamingwasameansofpromotion,

reachingnewaudiences,andanalyzingusagedata.Themusicaggregatorsand

thehitmakersweretheoneswhomadesignificantmoneybyofferingcomplete

catalogsthroughon-demandservices.Nother.Thelargestshareofherrevenues

hadalwayscomefromhard-corefanswho’dpayfromtwentydollarstoa

hundredforanewalbum.ShewouldreleasenewworkonBandcampfirst,then

uploadittoiTunes,andfinallymakeselectionsavailableelsewhere—YouTube,

Spotify,Pandora.Thatwindowingstrategy—makingcontentavailable

exclusivelyinaparticularchannelforaperiodoftime—hadprovenitself

effectiveforherandherhard-corefans.Shecouldthankherexistingsupporters

andcultivatenewrelationships.

YouTubewaslaunchinganewsubscriptionservice,MusicKey,whereusers

wouldpayafeetoavoidadvertising.IfKeatingwantedtocontinuemonetizing

herworkthroughYouTube,thenshewouldhavetoagreetoYouTube’sterms:

includeherentirecatalog,andstopwindowingelsewhere.Itwasallornothing.

Sheknewthattheindependentlabelsweren’thappyeitheraboutthenew

licensingterms,buttheyweremoreupsetbythefinancialrepercussions.

Keatingwantedtomaintaincontroloverhermusic,onherterms.

Shesawthepotentialofthebitcoinblockchainasatechnologythatcould

ensurethatgoal,startingwithitstransparency.“Ijustbelieveintransparencyin

everything,”shetoldForbes.“Howcanwebuildafutureecosystemwithout

knowinghowthecurrentoneactuallyworks?”

Forexample,onYouTube,

Keatingestimatesthattherearefifteenthousandvideos—danceperformances,

films,TVshows,artprojects,gamingsessions—thatusehermusicas

soundtrackswithoutherauthorization.Sheshouldbeabletoleverageallthat

enthusiasmforherwork,butonlyYouTubeknowsexactlyhowpopularher

musicis.Nielsen’sSoundScanisonlyonefacetofamultidimensionalpicture.

LikeHeap,Keatingwantstoregistercopyrightandleveragecopyright

metadataontheblockchain.Thatway,peoplecouldmoreeasilytrackherdown

asthecopyrightholder.Shecouldthentrackderivativeworksthroughthe

blockchain.Adistributedledgerofmusicmetadatacouldtracknotonlywho

createdwhat,butwhoelsewasmateriallyinvolved.Sheimaginesvisualizing

usageandrelationships,calculatingtherealvalueofasongfordynamicpricing,

andenablingongoingmicropaymentstocollaboratorsandinvestorswithout

third-partyblackboxeslikeASCAPorBMI.

Again,we’renotsayingthatthereisnoroleforlabelsortechnology

companies,andthatartistscouldjustmakeitontheirowninapurelypeer-to-

peerecosystem.Ratherwe’retalkingaboutanewkindofmusicecosystem

centeredontheartists,wheretheycontroltheirownfateandreceivefair

compensationforthevaluetheycreate.Blockchaintechnologywillnotcreatea

newstandardforhowartistsgetcompensated.Instead,itwillliberatethemto

chooseandcustomizeaninfinitearrayofsolutionsthatworkfortheirspecific

needsandbeliefs.Theycangiveitawayforfree,ormicromonetizeeverything

—butit’stheirchoice,notthelabel’sorthedistributor’s.

OtherElementsoftheNewMusicEcosystem

BasicCopyrightRegistration

Therearetwofundamentaldimensionstomusiccopyright.Thefirstisthe

worldwiderighttotheunderlyingcomposition—themusicalnotesandthelyrics

—inallformsandlanguages,andthat’susuallyheldbythecomposer-lyricist.

Themusicandthelyricscanbecopyrightedseparately.Thecomposer-lyricist

makesroyaltieswheneversomeonerecordsorperformsthesong,buysthesheet

music,adaptsitintoanothergenre(e.g.,elevatorMuzak),translatesitintoa

foreignlanguage,orincludesthemusicinananthologyortextbook.Thesecond

istheworldwiderighttothesoundrecording,aperformancecapturedand

preservedinsomemediumlikeadigitalfileormusicvideo.Therecordingis

usuallycopyrightedbytheperformerorbandmembers,whoearnroyaltieswhen

therecordingisplayedontheradio,television,ortheInternet;syncedwithTV

shows,commercials,orvideogames;streamed,downloaded,orpurchasedin

somehardmediumsuchasvinyl,CD,orDVD.

ZoëKeating’slevelofautonomywaswhatmotivatedToronto’sindustrial

rockband22Hertztoturntotheblockchain.InCanada,registeringcopyrightfor

onesongcostsfiftyloonies,andthecertificatecontainsonlythetitleofthe

work.Theband’sfounder,RalfMuller,didn’tthinkthat’dbehelpfulincourt,if

anyoneeverusedthelyricsormelody.Sohedecidedtogothehashingroute,by

creatingahashofthewholesongusingsomethingcalledanOP_RETURN

feature—andencodeditintotheblockchaininstead.Ifanyoneeverusedhis

wordsormusic,hecouldsimplydemonstratehisownershipbypointingtothe

transactionontheblockchain,doinganotherhashofthesong,andcomparingthe

secondhashwiththehashontheblockchain.Theywouldbeidentical.“Once

youencodeahashintheOP_RETURNandblockuponblockgetwrittenontop,

itisbasicallyimpossibletogobackandchangeanything.This,tome,is

incredible.”Whenaskedwhytheband’sonlinestorewasacceptingbitcoinand

offeringdiscountstobitcoinusers,Mullerrespondedemphatically,“I’mnotinto

‘businessasusual.’”

DigitalContentManagementSystem

NorisColu,adigitalcontentmanagementplatformbasedonbitcoinblockchain

technology.Itprovidesdevelopersandenterpriseswithtoolsforaccessingand

managingdigitalassetsincludingcopyright,eventtickets,andgiftcards—much

ofwhatatrulydistributedmusicindustrywouldneed.Coluhaspartneredwith

musictechnologyleaderRevelatortobuildarightsmanagementapplication

programminginterface(API).ThegoalistorealizewhatImogenHeapandZoë

Keatingwereimagining—thedemystificationofrightsownership,digital

distribution,andactualusage.TheAPIwillalsoprovideincumbentsameansof

providingthemuch-called-fortransparencyandefficiency.“Weareveryexcited

aboutthepotentialforColu’splatformtosimplifythemanagementofmusic

rights,startingwiththoseassociatedwithsongwritersandtheircompositions,”

saidBrunoGuez,founderandCEOofRevelator.“Coluhasmadethecomplex

technologyoftheblockchainaccessibleforintegrationsintoplatformslikeours,

andwe’relookingforwardtoexploringallthewaysitcanimproveserviceto

ourclients.”

TheNewArtistsandRepertoire(A&R)

Finally,akeyaspectofanycreativeindustryistalentscoutingandcoaching.

Musiciansnaturallyembracementoringandplayan“artistsandrepertoire”role

insuchcompetitionsasTheVoice.TheblockchainsupportsthistypeofA&R

withusagealgorithms.ConsiderPeerTracks.Accordingtoitslandingpage,itis

“theultimateonestopmusicplatform”forbothmusicloversandartists.

PeerTracksattachesasmartcontracttoeverysongthatanartistuploads,andthe

contractautomaticallydivviesuptherevenuesaccordingtowhateverdealthe

performermadewiththelyricist,thecomposer,andothermembersoftheband.

Artistscreatetheirowntokens,bearingtheirnameandlikenesssimilartoa

virtualbaseballcard.Tokensarecollectibles.Theartistsetsthenumberof

availabletokens.Sotherecouldbelimitededitions,sotospeak.Theconceptis

simple:createastoreofvalue,thevaluationofwhichcorrelatestotheartist’s

popularity.

Usersgetfullaccess,ondemand,totheentirePeerTracksmusiccatalogfor

freewithoutadvertisinginterruptions.Theycansavesongsandplaylistsfor

offlineuseanddownloadanysongoralbumfromthecatalog.Unlikewith

SpotifyoriTunes,userscanalsopurchasetokensofartistsandtradethese

tokenslikebaseballcards.Asanartist’sstarrises,thevalueofthetokensrises,

andsouserscouldpotentiallybenefitfinanciallyfromsupportingartistsbefore

theybecomefamous.LovinganartisttranslatesintoVIPtreatment,perquisites,

andfreebiesfromartists.Thisincentiveturnspeoplewhowouldbepassive

listenersonSpotifyintoactivepromotersandbuildsalong-term,engagedfan

base.PeerTracksintendstopayartistsmoreforstreamsanddownloads—

specifically95percentofrevenues—andtopaytheminstantaneouslyonthe

blockchain.Artistscansettheirownpriceformusicdownloadsand

merchandise.PeerTracksclaimsthat“swarmsofprofitdriventalent

scouts/curatorslookingforthenexthotstar/token”willhearanewartist’ssong

becausePeerTracksuserswillvotethemtovisibility.

ARTLERYFORARTLOVERS:CONNECTINGARTISTSAND

PATRONS

Thetraditionalartmarketisnotoriouslyexclusiveandopaque.Arelativelysmall

numberofartistsandcollectorsrepresentanincrediblylargepercentageofthe

market,andthereareveryfew,narrow,andsometimescircuitouspathsfor

emergingartiststoentertheartworld.Evenso,theopennessandgenerally

unregulatednatureoftheartmarketencouragesexperimentingwithnew

conceptsandnewmedia,democratizingtheartmarketononehand,and

democratizingcapitalmarketsontheother,withbothhandsonthe

transformativeanddisruptivepowerofthebitcoinblockchain.

Artlerydescribesitselfasanetworkofartistswhohaveagreedtoshare

someoftheirearningswithpatronsandpeerswhoengagesociallywiththeir

works.

Artlery’sgoalistomintanart-as-asset-backed-currencyonthe

blockchainbyengagingartloversaspartialownersandstakeholdersoftheart

withwhichtheyinteract.Itsapproachistoprovidetherightincentivesforall

sidesofthemarket—artists,patrons,curators,andvenuessuchasgalleries,

museums,studios,andfairs—ratherthanprovideperverseincentivesforone

partyattheexpenseoftheothers.Tofosterpatronageandbuildreputationforan

artist,Artlerystagesinitialpublicofferings(IPOs)ofdigitalpiecesofthat

artist’swork.Artlery’sappenablesartistssuchasJaZoNFrings,DavidPerea,

KeithHollander,BentonCBainbridge,andtheBazaarTeenstoreplicatetheir

physicalworksdigitally,breakthemintomanypieceslikeapicturepuzzle,and

apportionthemtopatronsbasedoneachpatron’slevelofappreciationfrom

withintheArtleryapp.Duringawork’sIPOperiod,patronscanaccumulate

interestuptothespecifiedpercentageofthepiecethattheartistinitiallygiftedto

thecommunity.Astheplatformmatures,Artleryplanstoallowforthetransfer

andsaleoftheaccumulatedinterestsintheworks.

Atthe2015StanfordBlockchainSummitsponsoredbyArtlery,Dondecided

tobackaworkbyAnselmSkogstad,titledEUR/USD3081,anartisticrendering

ofaeurocurrencynotemagnifiedandprintedonafifty-eight-by-forty-four-inch

Dibondaluminumcomposite.

BuyingArtThroughtheBitcoinBlockchain:HowItWorks

Topurchasethepiece,Donopenedhisbitcoinwalletapp.Heusedittocreatea

messagethatspecifiedtheamountofbitcoinrepresentingthepurchasepriceof

thepiece,designatedArtlery’spublickeyastherecipientofthatbitcoin,and

usedhisprivatekeyto“sign”orauthenticatethemessage.Dondouble-checked

allthefieldsbecause,unliketraditionalpaymentmethods,therewasno

reversingthisbitcointransaction.Thenhebroadcastthemessagenottohis

Canadianbankbuttotheentirenetworkofcomputersrunningthefullbitcoin

blockchain.

Somepeoplerefertothesecomputersasnodes,wheresomenodesare

donatingtheirprocessingpowertosolvethemathproblemassociatedwith

creatingablock.Aswe’veexplained,thebitcoincommunityreferstothemas

minersandtotheirproblem-solvingworkasmining,asingoldmining.It’san

awkwardanalogybecauseitconjuresimagesofexpertswhosetalentmight

confersomecompetitiveadvantageovernoobs(newbies).Itdoesn’t.Eachminer

isrunningthesoftwarelikeautilityfunctioninthebackground,andthesoftware

isdoingallthecomputations.Seriousminersconfiguretheirmachinesto

optimizetheirprocessingpower,minimizetheirenergyconsumption,and

leveragehigh-speednetworkconnectivity.Beyondthat,there’sreallynohuman

aptitudenecessaryandnohumaninterferencetolerated.

Notallnodesaremining.Infact,thevastmajorityofnodesonthebitcoin

networkaresimplyperformingbitcoinruleverificationofreceiveddatabefore

routingthedatatopeerconnections.Thenetworkverifiedthetwobitsofdata—

thatDoncontrolledtheamountofbitcoinspecifiedandauthorizedthe

transaction—andrecognizedDon’smessageasatransaction.Theminersthen

racetoconvertunorderedandunrecordedtransactionsintotransactionsordered

andrecordedinablockofdata.Eachblockhadtoincludethedigestorhashof

thepreviousblockoftransactions,aswellasarandomnumberknownasa

nonce.Towintherace,acomputermustcreateahashoftheblock;thishash

musthaveacertain,butarbitrary,numberofzerosatthebeginning.It’s

unpredictablewhichnoncewillproduceahashwiththecorrectnumberofzeros,

andsothecomputershavetotrydifferentnoncesuntiltheystumbleuponthe

rightvalue.It’sreallylikewinningthelotterybecausethere’snoskillinvolved.

However,ahumanbeingcanincreaseherchanceofwinningthelotteryby

buyingastate-of-the-artcomputerprocessorthatspecializesinsolvingbitcoin’s

mathproblems;buyingmoretickets,thatis,runningmultiplehigh-powered

nodes;or,ashumanbeingsoftendo,poolinghernodewithothernodes—like

colleaguesattheoffice—andagreeingtosplitthepotifoneoftheirnodeswins.

Sowinningisamatterofluck,processingpower,andthesizeofone’smining

pool.

Hashrateisameasureofthetotalprocessingpowerofthebitcoinnetwork.

Thehigherthetotalaggregatehashrateoftheentirenetwork,themoredifficult

itistofindtherightnonce.Whenaminerfindsahashwiththecorrectnumber

ofzeros,itsharesitsproofofworkwithallotherminersonthenetwork.Thisis

theotherbigscientificbreakthroughindistributedcomputing:usingproofof

worktoachievenetworkconsensus.It’sknownastheByzantineGenerals’

Problem.Theotherminerssignaltheiracceptanceoftheblockbyfocusingon

assemblingthenextblock,whichhastoincludethehashofthenewlymade

block.JustasDon’spublicandprivatekeysareuniquetohim,thehashofeach

blockisunique:itworkslikeacryptographicfingerprintthatmakesallthe

transactionsintheblockverifiable.Notwoblockfingerprintsarethesame.The

winningminerreceivesasetquantityofnewbitcoinsasareward—thesoftware

itselfmintsandallocatesthenewcoins—andthehashedblockisappendedto

thechain.

So,withintenminutesofDon’sbroadcastinghismessage,heandArtlery

receivedaconfirmationthatDon’sbitcointransactioncreatedwhatisreferredto

as“unspenttransactionoutput,”meaningthatArtlerycanspenditbydoingwhat

Donjustdid—broadcastingamessagethatspecifiestheamounttosendandthe

addressoftherecipient,andauthorizingthetransactionwithArtlery’spublic

key.IftheartistandthepatronsknewbothDon’sandArtlery’spublickeys,then

theycouldseethatthedealbetweenthemwentthroughandcouldseethe

amountofthetransaction.That’swhywecallitapublicledger—alltransactions

aretransparent—andpseudonymous,inthatwecanseetheparties’addresses,

thoughwecan’tseethenamesofthepersonsbehindthem.Everysubsequent

blockservedasfurtherconfirmationoftheirtransaction.

ProfileoftheNext-GenArtPatron:RedefiningMoney

NowDonownsapercentageinterestintherightsofanartisticrenderingofa

euro.Whenthephysicalworksells,theartist,thevenue,Don,andhisvirtual

patronsallreceiveaportionofthesaleaccordingtotheirlevelofparticipation.

Inotherwords,patronparticipationmatters.Patronswhointeractwiththeartist

andthework,whosharetheirappreciationinsocialnetworks,whosparkothers

toengagewithbothartistandart,andwhoessentiallyservetopromotethe

artist’sbrand,receivemorethandoesapassivepatronwhovieweditonceonline

andboughtastake.We’renotsurewhetherwritingaboutitinthisbookcounts

directlytowardDon’sparticipationpoints.Artlerywantssignalsofappreciation

—intheformofpositivereferencestoartistsandtheirworks—tocorrelatewith

theappreciationinvalueoftheworkitself,andsoperhapsfutureplatform

releaseswilltakeexampleslikeoursintoaccount.Artleryisinitially

concentratingongiftingapercentageofeachpiece’ssale.Futurereleasesofthe

platformwillallowpatronstopurchaseownershipstakesinartworkdirectly,

perhapssharingportionsofsubscriptionroyaltyrevenueorcopyrightlicensing

ofthework.

Byinvolvingmultiplepartiesdirectly,includingpatrons,intheprocess,and

engagingthemasstakeholders,Artleryisfocusingmoreeyesonaccounting.

Theblockchainasapublic,distributedledgerensuresopen,accurate,andtimely

processingoftransactions.Aspayoutsexpandbeyondfirstsale,secondarysale,

andsubsidiaryrightssuchasprintsandmerchandising,individualartistswill

neverbeactingalone.Theywillhaveacommunityofpatronstakeholders

behindthemtonegotiateandenforcetheircontractualrights.

Artleryutilizesthebitcoinblockchaininseveralways.First,itregistersthe

provenanceoftheartasmetadataontheblockchainthroughapartnershipand

APIintegrationwithanotherbitcoinstart-up,Ascribe.io,andituploadsthe

payouttablesothatallstakeholdersarepaidimmediatelyaccordingtotheirasset

shareswithimmediatetransparencyforallparties.Itisexploringvarious

techniquesforencodingthisinformation,suchasabitcoinscriptinside

transactions.Whileitsinitialtargetmarketisfineart,Artleryhassignificant

tractioninothercopyrightindustriessuchasmusic,books,andmovies,whichit

willtargetthroughthereleaseofitsownAPI.

PRIVACY,FREESPEECH,ANDFREEPRESSONTHEBLOCKCHAIN

Personalprivacy,freespeech,andfreepressareessentialtoanopen,free,and

prosperoussociety.Ononehand,citizensmustbeabletocommunicateprivately

andanonymously.Ontheotherhand,theymustbeabletospeakfreelyand

securelywithoutfearofrepercussion.Onlinecensorship,thehackingoflarge

institutionsandcivilsociety,andEdwardSnowden’srevelationsofmassand

targetedsurveillanceanddatafrackinghavedrivencitizensofwell-established

democraciestoseekanonymityandencryptiontechnologies.Thesetoolsenable

themtodisguisetheiridentitiesandscrambletheirmessagesintransitandin

storagesothatonlyauthorizedpersonsmayaccessthem.

Here’stherub—encryptiontechnologiesareeithernotlegalforindividual

useornotreadilyavailableinthosecountrieswhosecitizensneedthemmost.

TheWassenaarArrangement,amultilateralexportcontrolregimethat

technologicallyadvancednationsagreedto,governstheexportof“dualuse”

products,thatis,thosethatcouldbedeployedforbothgoodandevil.

Wassenaar’soriginalgoalwastokeephigh-techproductsoutofthehandsof

dictatorsinNorthKorea,Libya,Iran,andIraq.Anonymityandencryption

technologiessuchaspublickeyinfrastructurewereconsidereddualuse.

Today,incountriessuchasRussiaandChina,bothindividualsand

corporations—includingforeignfirms—mustseekauthorizationtousethem.In

countrieswheretheiruseisdiscretionary,governments—eventheObama

administration—haveaskedtechfirmstoinclude“backdooraccess,”thatis,a

secretmeansofbypassingthenormalauthenticationprocess(e.g.,loggingon

withapasswordorothersecuritycode)andgainingremoteaccesstoacomputer

anditsdatawithoutauthorizationordetection.ItisfarmoreinsidiousthanBig

Brother,becauseatleasteverybodyknewthatBigBrotherwaswatching.

Here,techfirmsaren’tsupposedtotellusersthatthere’sabackdoor.Nodoubt

hackerslookforthem,findthem,andusethem,too.

“Thetrendlinesregardingsecurityandprivacyonlinearedeeplyworrying,”

wroteDavidKaye,SpecialRapporteuroftheOfficeoftheUnitedNationsHigh

CommissionerforHumanRights.“Encryptedandanonymouscommunications

mayfrustratelawenforcementandcounter-terrorismofficials,andthey

complicatesurveillance,butStateauthoritieshavenotgenerallyidentified

situations—eveningeneralterms,giventhepotentialneedforconfidentiality—

wherearestrictionhasbeennecessarytoachievealegitimategoal.”

Hewent

ontosaythatlawenforcementandcounterterrorismagencieshavecometo

downplaygoodold-fashioneddetectiveworkanddeterrencemeasures,including

transnationalcooperation.

Notsurprisingly,onglobalmeasuresofthepreservationofpoliticaland

personalrights—thatis,privacyandthefreedomsofspeech,assembly,andthe

press,andthetoleranceofotherreligions,immigrants,politicalrefugees,and

homosexuals—Russiaranks114th,andChinasecondtolast,at160th.

For

whatit’sworth,theUnitedStatesisnoepitome:itranks28th.

BlockingWebsiteswithoutacourtorderhasbecomecustomaryinsuch

countries,andmanycensorshavefiguredouthowtothwartvirtualprivate

networksoftwareusedtopreventcensorship.

AccordingtoReportersWithout

Borders,Russiahasbeencurtailingfreedomsofexpressionandinformationand

blockingincreasinglymoresitessinceVladimirPutin’sreturntothepresidency

in2012,amongthemWikipedia.

Chinahasmasteredtheartofthetargeted

datablackout,censoringsearchtermsrelatedtoHongKong’s“OccupyCentral”

prodemocracymovementandthetwenty-fifthanniversaryoftheTiananmen

SquareprotestsonWeibo,China’sTwitterclone.Itmanagedtoblocknearly90

percentofallGoogleservices.Imprisonmentisalsopopularinthesecountries

whenpeoplepostcontentdeemedquestionablebythegovernmentonline.

FollowingtheChinesestockmarketcollapseinJuly2015,authoritiesarrested

morethanonehundredpeopleforusingsocialmediatospreadrumorsthat

“causedpanic,misledthepublicandresultedindisordersinstockmarketor

society.”

Governmentsthatwishtorepressthevoicesofcitizenseverywhereandhave

capturedtechnologiesliketheInternettosilencedissidentsandblockoutside

mediawillfindblockchaintechnologysignificantlymorechallengingforseveral

reasons.First,citizensandjournalistscouldusepublickeyinfrastructureto

encryptinformationandconcealtheiridentitiesfromwould-becensorsand

attackers.Second,wheregovernmentsdiscourageanddeprivegoodandhonest

journalismoffunding,journalistscouldraisefundsontheblockchain,castinga

widernetforinvestorssympathetictotheircause,especiallyinvestorswho

preferredtoremainanonymous.Finally,governmentscouldnotdestroyoralter

informationrecordedontheblockchain;therefore,wecoulduseittohold

governmentsandotherpowerfulinstitutionsaccountablefortheiractions.

Considercrowdfundingjournalistsontheblockchain.Ifwereleasedthem

fromthefinancialgripofstate-controlledmedia,theycouldcoverpoliticsfreely

whilepreservingtheanonymityofdonors.VeteranChinesejournalistscouldtry

oneofthedistributedpeer-to-peercrowdfundingplatformssuchasKoinify,

Lighthouse,orSwarmthatusePKItoprotecttheidentitiesofsenderand

recipientbetterthanInternet-onlysystems.Anothergreatblockchaintoolisthe

freemobileappGetGems,whichbothguardsandmonetizesinstantmessaging

throughbitcoin.Userscansendallsortsoffilessecurely,withGetGems

functioninglikeprivatee-mail,notjustSMS.

Theseappsarejustthe

beginningofwhatispossible.

Anothersolutionisadistributedplatformforfilingstoriesinanimmutable

ledgerthatmakestheledgerunique,suchaswhatFactomaimstoaccomplishin

thedevelopingworld.Reporterscouldpurchaseentrycredits—rightstocreate

entriesonFactom’sledger.Aswiththebitcoinledger,everyonewouldgetthe

samecopy,andanyonecouldaddtoitbutnoonecouldalterentriesoncethey

werefiled.Factomhasacommit/revealcommitmentschemethatservesasan

anticensorshipmechanism:serversinChina,forexample,couldn’tpreventthe

filingofanotherwisevalidentrybecauseofitscontent.Ifthereporterhad

attachedanentrycredittothefiling,thenitwouldgetrecorded.Agovernment

couldidentifycertainentriesasoffensivebutcouldn’tdeleteorblockthemas

theChinesegovernmenthasdoneonWikipedia.Ifanofficialcourtweretoorder

achangeintheledger,anofficerofthecourtcouldmakeanewentrytoreflect

theruling,butthehistorywouldremainforalltosee.

Athirdsolutionisdistributedpeer-to-peermicrobloggingthatdoesn’tgo

throughcentralizedservers.StephenPair,CEOofBitPay,describedhowto

reinventTwitterorFacebooksothatuserscontrolledtheirowndata.“Insteadof

havingjustonecompanylikeFacebook,youmighthavemanycompaniestying

intothiscommondatabase[theblockchain]andparticipatinginbuildingtheir

ownuniqueuserexperiences.Someofthosecompaniesmightaskyouforor

mightrequirecertaininformationtobesharedwiththemsothattheycould

monetizethat.Butasauser,youwouldhavefullcontroloverwhatinformation

you’resharingwiththatcompany.”

ThereisTwister,aTwittercloneinterms

offeelandfunctionalitydevelopedin2013byMiguelFreitas,ahackerand

researchengineeratPUC-RioUniversityinRiodeJaneiro,Brazil.Twister

leveragesthefreesoftwareimplementationsofbitcoinandBitTorrentprotocols

anddeployscryptographyendtoendsothatnogovernmentcanspyonusers’

communications.

GETTINGTHEWORDOUT:THECRITICALROLEOFEDUCATION

JoichiItoisamonganelitegroupofwidelysuccessfulentrepreneurs—fromBill

GatesandSteveJobstoBizStoneandMarkZuckerberg—whodroppedoutof

collegetoinventsomethingnewinthedigitaleconomy.

Itisahallmarkofour

entrepreneurialculturethatone’spursuitofanidea,togodeepandunderstand

itsnuancesasItolikestosay,drivesavisionaryoutoftheclassroomandinto

business.HenryFordandWaltDisneypursuedtheirpassionswithoutcollege

degrees.AndsoitisoneofthoseparadoxesthattheMassachusettsInstituteof

TechnologywouldchooseItotodirectitslegendaryMediaLab,attheepicenter

ofallthingsdigitalandrelevanttoculture.

Thetimingwasperfect.“DigitalcurrencyissomethingthatI’vebeen

interestedinevenbeforetheMediaLab....Iranoneofthereallyearlydigital

testserversfromtheDigiCashdaysinthe1990s.OneofthefirstbooksIever

wrotewasinJapanese,calledDigitalCash,thatIcoauthoredwithsomeonefrom

theBankofJapan.Sothishasbeenanareaofinterestformeforalongtimeand

predatesalotoftheotherstuffI’vebeendoing.”

WhenhegottotheMediaLab,variousacademicsweredabblinginsome

aspectofbitcoinrelativetotheircorediscipline—consensusmodels,

cryptography,computersecurity,distributedsystems,andeconomics—butno

onespecificallyfocusedonit.Hedidn’tseefacultydoingfundamentalresearch

aroundbitcoin,eventhoughMITstudentshadlaunchedtheMITBitcoinProject

togive$100ofbitcointoundergraduates.

ItohadasenseofurgencysimilartoImogenHeap’sinspreadingtheword

andformingteamsaroundlegal,technical,andcreativechallenges.Blockchain

technologiesweremovingmuchfasterthanInternettechnologieshad,but

withoutmuchacademicinvolvement.Thecoredevelopersofthebitcoin

protocolswererecoveringfromreputationalhits:theBitcoinFoundationwas

bankrupt,andboardmemberMarkKarpeleswasarrestedinJapanfor

embezzlementthroughhisMt.Goxexchange.Itomovedquickly.Helaunched

theDigitalCurrencyInitiative(DCI)attheMediaLabandhiredformerWhite

HouseadviserBrianFordetodirectit.Hebroughtthreeofthebitcoincore

developersintotheDCItoprovidethemwithstabilityandresourcessothey

couldfocusonthecode.

Hethoughtthatcreatinganacademicnetworkofuniversitiesinterestedin

supportingbitcoinwasimportant,andthat’sunderway.“We’resettingup

courses,we’retryingtoorganizeresearch,butwe’restillveryearly-stage,”he

said.“We’vejustgotthecorefundingtogethertosupporttheprogram,and

we’rejusttryingtodrumupinterestfromthefacultyandthestudentsinthe

space.”Morebroadly,hewantstheMITMediaLabtoreinventhighereducation

sothatpeoplelikehimwon’tdropoutandwillseethevalueofadiverseplace

liketheLab.It’sanopportunitytopilotthefutureofacademia.

MelanieSwan,aleadingblockchaintheoristandacademic,wasmore

specificaboutwheretoeducatestudentsabouttheblockchain,andit’snotin

traditionaluniversities.It’sontheblockchain.“It’sreallyacompleterevolution

inhowwedoeverything.Academiaisnottherightplacetodoacademic

thinkingaboutverynewthingsliketheblockchain,”shesaid.Forexample,

ratherthansubmittingresearchtoscholarlyjournalsforpublicationandwaiting

fromsixtoeighteenmonthsforarejectionorpublication,ascholarcouldpost

thepaperimmediatelyasSatoshiNakamotodidtoalimitedaudienceofpeers,

receivereviewsinrealtime,andestablishtheneededcredibilitytopublishtoa

largeraudience.Reviewerscouldvotereviewsupordownasredditorsdoon

Redditsothatthescholarwouldknowwhichonestotaketoheart.Thepaper

mightevenbeavailableforfree,butotherscientistscouldsubscribetodeeper

analysisorthreadeddiscussionwiththeauthor.Thescholarcouldmakeherraw

dataavailableorshareitwithotherscientistsaspartofasmartcontract.Ifthere

wasacommercialopportunityflowingfromthepaper,shecouldprotectthe

rightsinadvance,takingintoconsiderationwhofundedtheresearchandany

claimstheymightmaketothediscovery.

SwanisthefounderoftheInstituteforBlockchainStudies.“There’sthestart

ofadevelopmentofaneducationalinfrastructuretosupportlearningaboutthese

technologies.Obviously,allthemeetups,usergroups,andhackathonsare

tremendouslyuseful,”shesaid.“Everystrategyandaccountingconsultancyhas

ablockchainpracticegroupnow,andthereareeducationinstitutionslike

BlockchainUniversity.”

Swanherselfteachesablockchainworkshopat

SingularityUniversity.

Shetalkedofaneducationsystemwhereacollegestudentwouldbecome

whatshecalledan“educationalsommelier,”pairinginterestsorneededskills

withaccreditedcourses,potentiallymassiveopenonlinecourses(MOOCs).

“ThebenefitofMOOCisdecentralizededucation.SoIcantakethetopmachine

learningclassfromAndrewNgatStanfordUniversityviaCoursera.Icantake

thetopothercoursesatMIT.”Sostudentscouldfundtheirownpersonal

developmentprogramsanywhereintheworldandreceiveaccreditation.She

explained:“JustaswhenIgotaketheGREortheGMATortheLSAT,Ishow

upwithmyID,itconfirmslocallythatIamwhoIsayIam,Itakethattest,”and

thatlocalconfirmation“couldeasilybepartoftheMOOCinfrastructure.”

SwanhasbeenworkingonhowtodoMOOCaccreditationandtackle

studentdebtontheblockchain.Theblockchainprovidesthreeelementstoward

thisgoal:(1)atrustableproofoftruthmechanism,anoracle,toconfirmthatthe

studentswhosignedupfortheCourseraclassesactuallycompletedthem,took

thetests,andmasteredthematerial;(2)apaymentmechanism;and(3)smart

contractsthatcouldconstitutelearningplans.Considersmartcontractsfor

literacy.“Whydon’twetargetfinancialaidtowardpersonaldevelopment?Like

Kiva,butKivaforliteracy,”Swansaid,exceptthateverythingwouldbesuper

transparentandparticipantswouldbeaccountable.Donorscouldsponsor

individualchildren,putmoneytowardlearninggoals,andpayoutaccordingto

achievement.“SayIwantedtofundaschoolchildinKenya’sliteracyprogram.

Everyweekthischildwouldneedtoprovideproofofcompletionofareading

module.Perhapsit’sallautomatedthroughanonlinetestwheretheblockchain

confirmedthechild’sidentityandrecordedprogressbeforedisbursingthenext

week’sworthoffundingintowhatwemightcallthechild’s‘smartwalletfor

learning’sothatthechildcouldcontinuepaymentforschoolwithout

interference.Moneytowardagirl’seducationcouldn’tbedivertedtoher

brother’sschooling,”shesaid.

CULTUREONTHEBLOCKCHAINANDYOU

Aftertwoworldwarsinasinglegeneration,globalleadersadmittedthat

politicalandeconomicagreementscouldnot—wouldnever—maintainlong-

termworldpeace.Thoseconditionschanged,sometimesfrequently,sometimes

drasticallyso.Peacehadtoberootedinsomethingricher,moreuniversal,inthe

sharedmoralvaluesandintellectualfreedomsofsociety.In1945,threedozen

nationsconvenedtoformaneducationalbodyofsortsthatwouldmodela

cultureofpeace.ItbecameknownastheUNEducational,Scientific,and

CulturalOrganization(UNESCO).Itsmissionintheworldtodayis“tocreate

theconditionsfordialogueamongcivilizations,cultures,andpeoples.”

Throughthelensofblockchaintechnologies,musicians,artists,journalists,

andeducatorsareseeingthecontoursofaworldthatprotects,cherishes,and

rewardstheireffortsfairly.Allofusshouldcare.Weareaspeciesthatsurvives

byitsideas,notbyitsinstincts.Weallbenefitwhencreativeindustriesthrive

andwhenthecreativesthemselvescanmakealiving.Moreover,thesearethe

bellwethersofoureconomy—theyrevealfasterthannearlyanyotherindustry

howbothproducersandconsumerswilladoptandthenadaptatechnologyto

theirlives.Musicianshavelongbeenamongthefirsttoexploitinnovationsfor

thebenefitofagreatmanyothers,toooftenattheirownexpense.These

dedicatedmembersofoursocietyinspireus,andeverybusinessexecutive,

governmentofficial,andotherorganizationalleaderhasmuchtolearnfrom

themabouttheneweraofthedigitalage.

PARTIII

PROMISEANDPERIL

CHAPTER10



OVERCOMINGSHOWSTOPPERS:

TENIMPLEMENTATIONCHALLENGES

evSergeyevichTermenwasagiftedmusician,buthepreferredplayingwith

physics.BornintoRussianaristocracybeforetheturnofthetwentieth

century,TermenjoinedtheBolsheviksindismantlingthetsaristautocracy.One

ofhisearlymissionswastocreateadevicethatcouldmeasuretheelectrical

conductivityandcapacityofvariousgases.Hetriedgas-filledlamps,hetrieda

high-frequencyoscillator,andheeventriedhypnosis.

Theoscillatorendedup

workingwell,andsoTermen’sbossencouragedhimtoseekotherapplications

forit.Twoappswouldbecomelegendary.Themorewhimsicalofthetwostarted

outastwometalterminalswithnothingbetweenthem,likealampwithoutthe

glass.Termendiscoveredthat,ifheinfusedthisvoidwithgas,hecouldgauge

thegas’selectricalproperties.Hisdesignwasbrilliant:hesubstituted

headphonesfordialssothathecouldtakeacousticratherthanvisualreadings,

monitoringthepitchofthesignalthateachgasproduced.Itwaswayaheadofits

time,thestuffofDr.EmmettBrown’sgarageinBacktotheFuture.

DevoteesofTEDtalksandstudentsoftechnologicalhistoryalreadyknow

theendofthisstory:Termenstumbleduponameansofmakingmusicoutof

thinair.Wheneverheputhishandsnearthemetalterminals,thepitchofthe

signalchanged.Helearnedthathecouldmanipulatethepitchbytheprecise

positionandmotionofhishands.Hecalledhisdevicethe“etherphone,”known

todayasthetheremin,ananglicizedversionofhisname.Theotherappwasa

larger-scaleversionofthisapparatus,onethatwassensitivetomovementwithin

aradiusofseveralmeters.Itwasthefirstmotiondetector—sentryoftheether.

HedemonstratedbothoftheseinstrumentsattheKremlin,playinghis

etherphonewithabandonforComradeLenin.WhileLenindelightedinthe

etherphone,heputthemotiondetectorimmediatelytoworkinwatchingoverthe

Sovietstashesofgold.Ifanyonecrossedtheelectromagneticlinearoundthe

gold,they’dsetoffasilentalarm.BigBrothersuddenlyhadelectriceyes.

Themoralofthestoryissimple:Termen’sdevicesbroughtbothlightand

darknesstotheworld.Inapoignanttalk,“OurComradetheElectron,”Maciej

CeglowskipointedoutthesetwothemesinallofTermen’sinventions:assoonas

theygaveshapetoairynothing,theywereusurpedbydarkforces.Lenineven

co-optedelectricityinhispropaganda,equatingcommunismwithSovietpower

plustheelectrificationofthecountry.

ButitwasStalinwhoroundedupTermen

andhispeers,threwthemintotheKolymagulag,andforcedthemtoinvent

instrumentsoftyranny.

We’veheardbitcoinusedwithsimilargrandiosityincampaignsofall

stripes.Likeeveryrevolutionarytechnology,thebitcoinblockchainhasits

upsideanditsdownside.Inthepreviouschapters,we’vewalkedyouthroughthe

manypromisesofthistechnology.Thischaptershinesaspotlightonten

showstoppers—problemsandperils.Forgiveusifsomeofthesearetechnically

complicated.Wethinkitimprudenttosupersimplifytheseissues:weneeda

certainlevelofdetailforprecision.

Aswell,afterreadingthissectionyoumaybetemptedtodismissthese

blockchaininnovatorsbecausetheyfaceseriousobstacles.Weencourageyouto

considerwhethertheseareeither“reasonstheblockchainisabadidea”or

“implementationchallengestoovercome.”Wethinkit’sthelatter,andwe’dlike

innovatorstoviewtheseasimportantproblemstosolvecreativelyaswe

transitiontotheseconderaoftheInternet.Foreachchallenge,weproposesome

solutions.Inthefinalchapter,wepresentourthinkingonwhatwecandooverall

toensurethefulfillmentoftheblockchain’spromise.

1.THETECHNOLOGYISNOTREADYFORPRIMETIME

Asofthiswriting,mostpeoplehaveonlyavagueunderstandingofbitcointhe

cryptocurrency,andveryfewhaveheardofblockchainthetechnology.Youthe

readerareamongtheforward-thinkingfew.Bitcoinconjuresimagesranging

fromapyramidschemeandamoneyLaundromattoafinancialE-ZPassonthe

economichighwayforvalue.Eitherway,theinfrastructureisn’treadyforprime

time,sogoestheargument.

Thechallengeismultifaceted.Thefirstfacetborrowsfromsciencefiction

authorWilliamGibson,thatthefutureishere;itsinfrastructureisjustunevenly

distributed.HadGreekcitizensknownaboutbitcoinduringtheircountry’s

economiccrashin2015,theystillwould’vebeenhard-pressedtolocateabitcoin

exchangeorabitcoinATManywhereinAthens.Theywouldn’thavebeenable

totransfertheirdrachmasintobitcoinstohedgeagainsttheplummetingfiat

currency.ComputerscientistNickSzaboandinformationsecurityexpert

AndreasAntonopoulosbotharguedthatrobustinfrastructuremattersandcan’t

bebootstrappedduringcatastrophes.AntonopoulossaidthatGreece’s

blockchaininfrastructurewaslackingatthetimeofthecrisis,andtherewas

insufficientbitcoinliquidityforanentirepopulationtomoveitstroubledfiat

currencyintoit.

Ontheotherhand,thebitcoinblockchainisn’treadyforGreeceeither.

That’sthesecondfacet:itfallsshortonsecuritycontrolsforsuchamassive

bumpinusage.“Thesystemlacksthetransactionalcapacitytoon-boardten

millionpeople.Thatwouldrepresentalmostatenfoldincreaseinuserbase

overnight,”saidAntonopoulos.“RememberwhathappenedwhenAOLdumped

2.3millione-mailaccountsontotheInternet?Wequicklydiscoveredthatthe

Internetwasn’tready,intermsofspamprotectionandNetetiquette,toabsorb

2.3millionnoobswhodidn’thavetheculture.That’snotgoodforanimmature

technology.”

Theblockchainwouldbesusceptibletocapacityproblems,system

failures,unanticipatedbugs,andperhapsmostdamaging,thehuge

disappointmentoftechnicallyunsophisticatedusers,noneofwhichitneedsat

themoment.

Thatrelatestothethirdfacetofthisshowstopper,itsinaccessibilitytothe

averageperson.There’snotenoughwalletsupport,andmanyinterfacesareuser-

unfriendly,requiringahightoleranceforalphanumericcodeandgeekspeak.

Mostbitcoinaddressesaresimplystringsofbetweentwenty-sixandthirty-five

charactersbeginningwithaoneorathree,quitetedioustotype.AsTyler

Winklevosssaid,“WhenyougotoGoogle.comyoudon’ttypeinastringof

numbers.Youdon’ttypeinanIPaddress.Youtypeinaname,awordthatyou

canremember.Andthesamegoeswiththebitcoinaddresses.Bitcoinaddresses

shouldn’tbeexposedtotheaverageuser.Littlethingslikethatmakea

difference.”

Sothere’smuchworktobedoneinbasicuserinterfaceand

experience.

Criticshavealsoraisedconcernsaboutlong-termilliquiditybecausebitcoin

isfiniteinquantity—21millionby2140—andminedatadiminishingrate.It’sa

rules-basedmonetarypolicyintendedtopreventinflationtriggeredbyarbitrary

anddiscretionarymonetarypolicies,aphenomenoncommonplaceformanyfiat

currencies.Satoshiwrote,“It’smoretypicalofapreciousmetal.Insteadofthe

supplychangingtokeepthevaluethesame,thesupplyispredeterminedandthe

valuechanges.Asthenumberofusersgrows,thevaluepercoinincreases.Ithas

thepotentialforapositivefeedbackloop;asusersincrease,thevaluegoesup,

whichcouldattractmoreuserstotakeadvantageoftheincreasingvalue.”

Atthemargin,coinsstoredinlostwalletsorsenttoaddresseswhoseowners

havelosttheirprivatekeysarenotrecoverable;theyjustsitdormantonthe

blockchain,andsotherewillbefewerthan21millionincirculation.Early

adoptershavetendedtoholdontobitcoinastheyholdontogold,hopingthatits

valuewillincreaseinthelongrun,andthereforetreatingbitcoinasanasset

ratherthanasamediumofexchange.Accordingtoeconomictheorists,lowor

noinflationmotivatesholderstohoardratherthanspendtheirbitcoin.Still,if

moretrustedbitcoinexchangesfacilitateconsumers’movementinandoutof

bitcoin,thenthefrequencyandvolumeoftradingcouldincrease.Ifmore

merchantsacceptbitcoinasamediumofpayment,thenpeoplewho’vebeen

sittingonbitcoinsmaystarttousetheirstoreforpurchases,therebyfreeingup

morebitcoins.Ifmerchantsbegintoissuebitcoin-denominatedgiftcards,then

morepeopleshouldbeexposedtocryptocurrenciesandbecomemore

comfortabletransactinginbitcoin.Andso,hypothetically,peoplewillhave

fewerreasonstohoardbitcoin.Advocatesofthebitcoinprotocolarguethat,

becausebitcoinsaredivisibletoeightdecimalplaces—thesmallestunitiscalled

aSatoshi,worthonehundredthofamillionthofabitcoin—thesmallest

denominationswillbuymoreifdemandforbitcoinincreases.There’salsothe

possibilityoftweakingtheprotocolstoallowforgreaterdivisibility,say,

picopayments(trillionthsofabitcoin)andtoreminestrandedbitcoinaftera

periodofdormancy.

Afifthdimensionishighlatency:forthebitcoinblockchainnetwork,the

processofclearingandsettlingtransactionstakesabouttenminutes,whichisfar

fasterendtoendthanmostpaymentmechanisms.Butclearingtransactionsat

thepointofsaleinstantaneouslyisnottheissue;therealproblemisthatten

minutesissimplytoolongfortheInternetofThingswheredevicesneedto

interactcontinuously.CoredeveloperGavinAndresensaidsolvingforatrillion

connectedobjectsis“adifferentdesignspacefrombitcoin,”aspacewherelow

latencyismorecriticalandfraudislessofanissueorwherepartiescould

establishanacceptableleveloftrustwithoutthebitcoinnetwork.Tenminutesis

alsotoolongforfinancialtransactionswheretimingmatterstogetanassetata

particularprice,andwherelatencyexposestraderstotime-basedarbitrage

weaknessessuchasmarkettimingattacks.

Theimmediatesolutionfor

entrepreneurshasbeentoforkthebitcoincodebase,thatis,tomodifythesource

codebytweakingafewparameters,andtolaunchanewblockchainwithan

altcoininplaceofbitcoinasincentivetoparticipate.Litecoinisapopularaltcoin

withablocktimeof2.5minutes,andRippleandEthereumareentirely

reengineeredblockchainplatformsthathavelatencyofseconds,notminutes.

AsixthdimensionisbehavioralchangeinadeepersensethanNetiquette.

Today,manypeoplecountontheirbankorcreditcardcompany,eventalking

witharealperson,whentheymakeanaccountingerror,forgettheirpasswords,

orlosetheirwalletsorcheckbooks.Mostpeoplewithbankaccountsaren’tinthe

habitofbackinguptheirmoneyonaflashdriveoraseconddevice,securing

theirpasswordssothattheyneedn’trelyonaserviceprovider’spasswordreset

function,orkeepingthesebackupsinseparatelocationssothat,iftheylosetheir

computerandallotherpossessionsinahousefire,theydon’tlosetheirmoney.

Withoutthisdiscipline,theymightaswellstufftheirmattresswithcash.With

greaterfreedom—betterprivacy,strongersecurity,andautonomyfromthird-

partycoststructuresandsystemfailures—comesgreaterresponsibility.Forthose

consumerswhodon’ttrustthemselvestokeepsafebackupsoftheirprivatekeys,

third-partystorageproviderscouldprovidebackupservice.

Aseventhdimensionissocietalchange.Moneyisstillasocialconstruct

representingwhatasocietyvalues.Itisendogenoustothatsociety,itmanifests

becauseofhumanrelationships,anditadaptstoevolvinghumanneeds.“You

can’ttakethesocialoutofmoney,”saidIzabellaKaminskaoftheFinancial

Times.“Alotoftheseprotocolsattempttodothatbycreatinganabsolutistand

veryobjectifiedsystem.Itjustdoesn’treflecttheworldasitis.”Shepointedto

theeurosystemasanexampleofhowonesize—onesetofprotocols—doesn’t

fitallcountries.

SheechoedwhatAntonopoulossaidabouttheveryhuman

needforsocietiestoforgiveandforgetinordertomoveon.“There’saverylong

traditioninfinanceofobliteratingrecords,becauseweasasocietybelievethat

it’swrongtopersecuteordiscriminateagainstindividualsforsomethingtheydid

tenorfifteenyearsago.Wehavethiswholedebtjubilee-esquementality

becausewethinkpeopleshouldbegivenanotherchance.Creatingasystemthat

neverforgetsisslightlysociopathic,”shesaid.

Thatleadsustotheeighthdimension,thelackoflegalrecourseinaworld

ofirrevocabletransactionsandunvoidablesmartcontracts.Accordingtolegal

scholarsPrimaveraDeFilippiandAaronWright,“Peopleare,indeed,freeto

decidetheparticularsetofrulestowhichtheywanttoabide,but—afterthe

choicehasbeenmade—cannolongerdeviatefromtheserules,totheextentthat

smartcontractsareautomaticallyenforcedbytheunderlyingcodeofthe

technology,regardlessofthewilloftheparties.”

Thisveryhighdegreeof

certainty—mathematicalcertainty—astotheoutcomeofatransactionorasmart

contractisunprecedentedinsociety.Itdeliversgreaterefficienciesand

effectivelyeliminatesnonperformanceriskbecausewehavenochoiceofbreach,

nochoiceofdamages.Butthat’salsoadownside.Itallowsnoroomforhuman

beings.ToJoshFairfieldofWashingtonandLeeUniversitySchoolofLaw,that

means“moremessiness,notless.We’regoingtoseemorefights.‘Youdidn’t

actuallyrenovatemyhouse,Iwantmymoneyback.’We’regoingtoseemore

humanmessiness,butmorehumanmessinessdoesn’tmeanthetechnologyis

bad.”

Butwillpeopleactuallytakethecounterpartytocourt?DeFilippiestimated

that,intheanalogworld,80percentofcontractbreachesaren’tenforcedbecause

they’retoocostlytopursueincourt,tooexpensivetogointoproceedings.Why

shouldthosenumbersimproveinablockchainworld?Whenthecodeindicates

thatthecontracthasbeenfullyexecutedratherthanbreached,exceptoneparty

isdissatisfiedwiththeoutcome,willthedissatisfiedpartyactuallypursuea

lawsuit?Willthecourtsrecognizethecase?Willthesmallbusinessownerback

awayfromthecorporatelegalteamofDewey,Cheatham,andHoweor—with

hismodestresources—evenbeabletoidentifyhisanonymouscounterparty,so

thathecouldfilealawsuitinthefirstplace?

2.THEENERGYCONSUMEDISUNSUSTAINABLE

Intheseprimordialdaysofthebitcoinblockchain,theproof-of-workmethod

describedinchapter2hasbeencriticaltobuildingpeople’strust.Yearsfrom

now,wewilllookbackandappreciatethegeniusofitsdeployment,from

mintingandallocatingnewbitcoinstoassigningidentityandpreventingdouble

spending.Prettyremarkable.Andprettyunsustainable,accordingtocriticsof

cryptocurrenciesthatuseproofofworktokeepthenetworksafeand

pseudonymous.

Hashing,theprocessofrunningpendingtransactionsthroughthesecure

hashalgorithm256(SHA-256)tovalidatethemandsolveablock,burnsalotof

electricity.Somepeopleintheblockchainecosystemaremakingback-of-the-

envelopecalculationsthatbecomememesinthecommunity.Estimateslikenthe

bitcoinnetwork’senergyconsumptiontothepowerusedbynearlyseven

hundredaverageAmericanhomesatthelowendofthespectrumandtothe

energyconsumedbytheislandofCyprusatthehighend.

That’smorethan

4.409billionkilowatt-hours,

aGodzilla-sizedcarbonfootprint,andit’sby

design.It’swhatsecuresthenetworkandkeepsnodeshonest.

Inearly2015,TheNewRepublicreportedthatthecombinedprocessing

powerofthebitcoinnetworkwashundredsoftimesgreaterthantheaggregate

outputoftheworld’stopfivehundredsupercomputers.“Processingand

protectingthemorethan$3billionworthofbitcoinsincirculationrequiresmore

than$100millioninelectricityeachyear,generatingavolumeofcarbon

emissionstomatch.”Thearticle’sauthor,NathanSchneider,wrotewhathas

beenonourmindseversince:“Allthatcomputingpower,whichcouldbecuring

cancerorexploringthestars,islockedupinmachinesthatdonothingbut

processbitcoin-typetransactions.”

Ascitizenswhocareaboutourplanet,weshouldallbeconcerned.Thereare

twoissues,onearoundtheelectricityusedtorunthemachinesandanother

aroundtheenergyusedtocoolthemsothattheydon’tfail.Here’saruleof

thumb:foreverydollaracomputerburnsupinelectricity,itneedsfiftycentsto

cooldown.

TheacutedroughtinCaliforniahasraisedseriousconcernsover

usingpreciouswatertocooldatacentersandbitcoinminingoperations.

Asthevalueofbitcoinincreases,thecompetitionforminingnewbitcoin

increases.Asmorecomputingpowerisdirectedatmining,thecomputational

problemthatminersneedtosolvebecomesmoredifficult.Onemeasureofthe

totalprocessingpowerofthebitcoinnetworkisthehashrate.GavinAndresen

explains:“Let’ssaywehavemillionsoftransactionsperblock,eachpayingan

averageofadollartransactionfee.Minerswouldbepaidmillionsofdollarsper

block,andtheywouldspendalittlelessthanthatinelectricitytodothatwork.

That’showtheproof-of-workeconomicsworkout.Itreallyisthepriceof

bitcoinandhowevermuchrewardisinablockthatdriveshowmuchhashingis

done.”

Thehashratehasbeenincreasingconsiderablyoverthelasttwoyears,

risingforty-five-foldinlessthanayear.Andthetrendistowardusingmore

energy,notless.

“Thecostforhavingnocentralauthorityisthecostofthatenergy,”saidEric

Jennings,CEOofFilament,anindustrialwirelesssensornetwork.

That’sone

sideoftheargument.Theenergyiswhatitis,andit’scomparabletothecost

incurredinsecuringfiatcurrency.“Allformsofmoneyhavearelationshipto

energy,”saidStephenPairofBitPay.Herevisitedthegoldanalogy.“Goldatoms

arerareonearthbecauseanintenseamountofenergyisneededtoformthem.”

Goldispreciousbecauseofitsphysicalproperties,andthosepropertiesderive

fromenergy.Pairmusedthatartificiallymanufacturinggoldwouldrequire

nuclearfusion.

Fromoneperspective,allthiselectricityconsumptionmakessense.Erik

Voorhees,founderofthecoinexchangeShapeShift,saidcriticswereunfairin

callingtheenergyspentonbitcoinminingawaste.“Theelectricityisbeing

burnedforapurpose.Thereisarealservicebeingprovided,thesecuringof

thesepayments.”Heurgedcriticstocompareitwiththeenergyburnedbythe

currentfinancialsystem.Thinkofthebigvaults,thebunkerlikearchitecturewith

majesticGrecianfacades,HVACsystemspushingfrigidairintobrightlobbies,

competingbranchesoneverycorner,andATMsinbetween.“Thenexttimeyou

seeaBrink’sarmoredtruckpumpingblacksootintotheair,comparethattothe

burningofelectricityinbitcoining.Itisnotquiteclearwhichisworse,”

Voorheessaid.

Thesecondenergy-relatedissueiscomputerarchitectureitself.For

backwardcompatibilitywithslower-changinglegacysystems,yourlaptoporPC

islikelyatypeofcomplexinstructionsetcomputer(CISC)thatcanrunawide

rangeofmathappsthattheaveragepersonwillnevereveruse.Whenengineers

realizedthatthey’dseriouslyovershotthemarket,theycreatedthereduced

instructionsetcomputer(RISC).YourmobiledeviceislikelyanadvancedRISC

machine(ARM).Whatminersrealizedwasthattheycouldalsoharnesstheir

graphicsprocessingunittoincreaseprocessingspeed.BecausemodernGPUs

havethousandsofcomputingcoresoneachchip,theyareidealforcomputations

thatcanbedoneinparallel,suchasthehashingdoneinbitcoinmining,There

weresometrade-offs,andestimatingthemachine’senergyconsumptiongot

slightlymorecomplicated,butforthemostpartGPUscoulddothework.

“IfIcandesignaRISCcomputertobeoh-so-superfastandmassively,near

insanelyparalleltotrythebillionsofkazillionsofcodessimultaneouslywith

littleornoelectricity,Iwillmakemoneyoutofthinair,”

saidBobTapscott,

Don’sCIObrother.That’swhattheBitFuryGrouphasdone:builtamassively

parallelbitcoinsolverwithapplicationspecificintegratedcircuits(ASICs)that

areenergyefficientanddesignedsolelytominebitcoins.ItsfounderandCEO,

ValeryVavilov,arguedtheviewthatmachinesandminingoperationsoverall

willcontinuetogetmoreenergyefficientandenvironmentallyfriendly.Someof

thatdependsonrelocatingtocoldclimateswhereenergyischeapandpreferably

renewable,suchashydroorgeothermal,andwhereeitherMotherNature

handlesthecoolingormanufacturersfigureoutanefficientwaytocapturethe

heat.BitFury,forexample,hastwodatacenters—oneinIcelandandanotherin

thecountryofGeorgia—withplansforadditionalcentersinNorthAmerica,and

itacquiredtheHongKong–basedstart-upAlliedControl,whichspecializesin

immersioncoolingtechnology.

AndsoBitFuryisworkingtoreducethe

ecologicalimpactofthebitcoininfrastructure.

Eveniftheseinitiativeslimitmining’scarbonfootprint,westillhavethe

rapidconsumptionanddisposalofthesecontinuallyupgradeddevices.Miners

whowanttomakeacareerofitmustcontinuallyupgradeandspecializetheir

systems.Mostminingequipmenthasausefullifespanofthreetosixmonths.

BobTapscottlikenedfirmssuchasBitFurytothoseYukonshopkeepersduring

thegreatgoldrush:theymadetheirrealfortunebysellingbetterandbetter

shovelstotheminers.

Wefoundoneminer’sdescriptionofhisCointerra

TerraMinerIVbitcoinwithanASICchipthatwassoenergyintensivethathis

home’selectricalsystemcouldn’thandleit.“Iamsellingthreeunitsbecausemy

houseisoldandhassubstandardwiring.Idonotwantafire.”Thestartingbid

wasfivethousanddollars.

VendorssuchasMRIofAustraliaareapplyingnew

approachestorecycling,firstdisassemblingratherthanshreddingallthese

computingcomponents,andthenmanagingresultingwastestreams.Such

creativeprocessesareenablingthemtoreclaimpreciousmetalsandreuseupto

98percentofproductbyweight.

Unfortunately,hardwarerecyclingisstillnot

widelyavailabletomostconsumers.

Forbitcoin’scoredevelopers,theconcernislegitimateandworthsolving:

“Ifbitcoinreallydoesbecomeaglobalteamnetwork,Ithinkwewillneedto

slowlymoveawayfromproofofworkastheonlywayit’ssecure,”said

Andresen.“Intheverylongrun,maybewewillmoveawayfromproofofwork

asthewaythenetworkissecured,andwe’llcombineitwithsomethingelse.”

That’swhatseveralaltchainshavedone:exploredalternativeconsensus

algorithmssuchasproofofstakeforsecuringthenetworkwhileretaining

decentralization.Theopensourcenatureofthebitcoinprotocolmakesit

technicallyeasytodo.Remember,thepurposeofconsensusalgorithmsisto

distributetherighttodecidewhatthestateoftheblockchainistoadecentralized

setofusers.TothemindofVitalikButerin,thevisionarybehindEthereum,there

areonlythreesecurelydecentralizedsetsofusers,andeachsetcorrespondstoa

setofconsensusalgorithms:ownersofcomputingpower,withstandardproof-

of-workalgorithm;stakeholders,withvariousproof-of-stakealgorithmsin

walletsoftware;andmembersofasocialnetwork,witha“federatedstyle”

consensusalgorithm.

Notethatonlyoneofthoseconsensusmechanisms

includesthewordpower.Ethereumversion2.0willbebuiltonaproof-of-stake

model,whereasRippleusesafederatedmodel,asmallcontrolledgroupakinto

somethinglikeSWIFT,theglobalproviderofsecurefinancialmessaging,where

authorizedgroupsreachconsensusonthestateoftheblockchain.

Thosesystemsdon’tburnelectricityasthebitcoinblockchaindoes.Bram

Cohen,founderofTor,hasintroducedafourthwaytoaddresstheenergywaste,

whathecalls“proofofdisk,”whereownersofdiskstoragespace—peoplewho

havecommittedachunkofcomputermemorytomaintaininganetworkand

performingnetworkfunctions—definestheeconomicsetofusers.Ofthese

alternativestoproofofwork,Blockstream’sAustinHillcautionedagainstusing

alternativemethodsforsecuringconsensus.“Experimentationwithyourproof-

of-workalgorithmisdangerous,andit’sanewareaofcomputerscience.”

It

addsanadditionaldimensiontoinnovation:notonlymustdevelopersworry

aboutwhethertheirnewfeaturesandfunctionswillworkintheirownright,but

theymustalsocheckhowthechoiceofconsensusalgorithmkeepsthemsecure

anddistributedtothemostappropriateeconomicset.

Overall,theexpression“Ifthereisawill,thereisaway”applies.The

smartesttechnologistsontheplanetareworkingoncreativesolutionstothe

energyproblem,withmoreefficientdevicesanduseofrenewableenergy.

Further,ascomputersbecomeinexorablysmarter,theywillundoubtedlyprovide

theirownsolutions.BitcoinangelinvestorRogerVer,nicknamedBitcoinJesus,

said,“SaythesmartesthumanhasanIQupcloseto200.Imagineartificial

intelligenceswithanIQof250,orsay500,or5,000or5million.Therewillbe

solutions,ifwehumanswantthem.”

3.GOVERNMENTSWILLSTIFLEORTWISTIT

Tolibertariansandanarchists,SatoshiNakamotowrote,“Youwillnotfinda

solutiontopoliticalproblemsincryptography.”

Theywouldhavetolook

elsewhereforacure-alltobiggovernment.Satoshiviewedhisexperimentasa

gaininanewterritoryoffreedom,notatotalupheaval.Wheregovernmentshad

succeededinbeheadingcentrallycontrollednetworkslikeNapster,purepeer-to-

peernetworkslikeTorwereabletopersist.Couldthebitcoinblockchain

networkholditsownagainstmightycentralauthorities?

Thatmightbethebiggestunknown.Whatwilllegislators,regulators,and

adjudicatorsaroundtheworldmakeofblockchaintechnologies?“Thecourtsare

goingtogetitwrong.They’vealreadystartedtogetitwrong,applying

intellectualpropertyrulestoanythingthatisintangible.Theythinkthat

physicalityisthedividinglinebetweenvirtualpropertyandintellectualproperty,

andit’snot,”saidJoshFairfield.“There’snointellectualpropertyelement,

there’snopartofabitcointhatisintellectualproperty,there’snocreativespark

forcopyright,there’snopatentableidea,there’snopatent,there’sno

trademark.”

AccordingtoStephenPairofBitPay,“Thebiggestthreatto

bitcoinisthatitbecomessoheavilyregulatedatsomepointthatacompetitor

that’smoreprivateandmoreanonymousshowsupandeverybodyswitchesto

that.”

Onething’sforsure:“Whatevertheparticularpolicyissueis,ifyou

don’tunderstandthetechnologyandyoudon’tunderstandtheimplications,

you’resettingyourselfupforfailure,”saidJerryBritoofthebitcoinpolicythink

tankCoinCenter.“Ifyoudon’tunderstandit,youcanintroducelawandpolicy

that’sgoingtoharmthedevelopmentofthetechnology.Wejustwantyouto

understandwhatyou’redoing.”

Sotheirchallengeisformidable.Theymustoverseetheunforeseeable.On

theonehand,theymustavoidstiflinginnovationbyoverreactingtoworstcases

—humantrafficking,illicitdrugtrade,gunrunning,childpornography,terrorism,

taxevasion,andcounterfeiting,forinstance.Ontheotherhand,theymustnot

twistnewbutunprovenapplicationssuchasblockchain-basedplatformsfor

identitymanagementtorestrictcivilliberties.Theremustbeastableapproachto

regulation,legislation,andtheinternationalnegotiationoftreatiestominimize

regulatoryuncertainty,sothatinvestorswillcontinuetosupportthetechnology’s

globaldevelopment.

Jurisdictionalreadymatterswhenitcomestousingbitcoin.Some

governmentshavebanneditorbannedstatebanksfromexchangingit,asChina

hasdone.Britosaid,“InatypicallyChineseway,it’snotillegal,butitcouldbe

atanymomentandeverybodyknowsit.”

Chinaisallowingaserious

professionalminingcommunitytoflourishandthoseminingpoolshavebecome

quiteinfluentialindebatesoverupgradestothebitcoinprotocol.Whathappens

toblockchainsecurityifChinasuddenlybansmining,too?Otherjurisdictions

havemovedtodefinebitcoinnarrowly,astheU.S.InternalRevenueServicehas

done.TheIRShaslabeledbitcoinasanassetforcalculatingtaxesonthe

appreciationofvalue.

Legalframeworksalsomatter.LegalscholarsDeFilippiandWrightdon’t

thinkthecurrentonecanhandlethequestionsraisedbysmartpropertydeployed

globallyatscale.Smartcontractsbothdefineandmanageownershiprights.

Theircodemakesnoassumptionsabouttheassignmentofrights,andcodecan’t

arbitrarilyseize,divest,ortransfertheserights.Forexample,ifduringthe

processoflandregistration,governmentofficialsassignedtheownershipofa

parceloflandtosomeonewhoisn’tthelegalownerofthatparcel,thatperson

wouldhaveabsolutesovereigntyovertheparcel,andthelegalownercouldn’t

simplyreversetheassignment.

JoshFairfieldfocusesmoreonprocess:“Thecommonlawisn’taffecting

technologylaw;thecommonlawistechnologylaw.Thecommonlawisthe

processofadaptinghumansystemstotechnologicalchange...therealfightis

howdowetakeoldrulesmeantforoldtechnologyandadaptthemrapidlyand

competently,”sothattheyarerecognizablewhenwestartusingthembutiterated

sothatthey’restateoftheartwhenthetechnologyreallyhits.

Lastbutnotleast,andthisshouldbenosurprise,identitymattersbig-time—

oratleasthowweconstructitontheblockchainmatters.“Peoplehaveavery

simplisticviewofidentity,”saidAndreasAntonopoulos.“Iamactuallyterrified

oftheimplicationsofdigitalidentitybecauseIthinkpeoplewilltakeshortcuts..

..Ifwetransferidentitytothedigitalworldwhereviewsareinflexible,we

actuallyendupwithaconstructthatdoesnotresemblethesocialconstructof

identity,butisaterrifying,fascistcopyofit.”

Combineapreciselycodedversionofpersonhoodwithapreciselycoded

versionofsociety,andyougetthestuffofsciencefictionnovelsandArnold

Schwarzeneggermovies.LegalscholarsDeFilippiandWrightconjuredimages

of“self-enforcingcontracts,walledgardensortrustedsystems,ownedand

managedbyasophisticatednetworkofdecentralizedorganizationsthatdictate

whatpeoplecanorcannotdo,withoutanykindofconstitutionalsafeguardsor

constraints.”Inotherwords,amachine-driventotalitarianregime.

ArtificialintelligenceexpertSteveOmohundrothrewthisphraseatus:the

dictator’slearningcurve,orhowcavedwellersendupwithspaceage

technology.ThinkaboutalltheAIlabsouttherestaffedbytheworld’ssmartest

PhDswithaccesstotheworld’smostpowerfulcomputers.PhDsmightforkthe

bitcoincodeorwriteasmartcontractthatcontrolsadrone’sdeliveryofa

package,wherebitcoinisheldinescrowuntilthatexactmomentwhenthe

packagearrives.Let’ssaythesePhDspostthatsoftwareasopensourcecodeto

theInternet,becausethat’swhattheydotomovetheirideasforward;theyshare

ideas.SonowISISdoesn’tneedanAIlab,itdoesn’tneedasoftware

developmentteam.Itjustneedstosubstituteagrenadeforthepackage.That’s

thedictator’slearningcurve,andit’snotsteep.Butdon’tblamethecodeorthe

cultureofsharing.It’snotnecessarilywhatwedowiththecode;it’swhatwe

don’trealizewe’redoingwithit—theunintendedconsequencesofafriction-free

world.

4.POWERFULINCUMBENTSOFTHEOLDPARADIGMWILLUSURP

ManyofourconcernsaboutthefirstgenerationoftheInternethavecometrue.

Powerfulcorporationshavecapturedmuchofthetechnologyandareusingitin

theirvastprivateempirestoextractmostofthevalue.Theyhaveclosedoff

opportunityandprivatizedmuchofourdigitalexperience.Weuseproprietary

storestoacquireandusenewappsonourphones,tablets,andnowwatches.

Searchenginesandmarketingdepartmentsalikeinterruptourcontentwith

advertising.Bigcompaniesthatpromoteandprosperfromconsumer

transparencyarenotoriouslysecretiveabouttheiractivities,plans,technology

infrastructures,andinformationassets.Tobesure,somecompanieshaveopened

upvoluntarily,butmanyothershavemerelyreactedtothesunlightof

whistleblowersandinvestigativejournalism.Suchdisclosuresaredwarfedby

effortstohideoperationsandconcealinformation.

Simplyput,theyhaven’tbeengoodstewardsofthepublictrust.

Caseinpoint:thebankingindustry.“Banksaretraditionallysecretkeepers,”

accordingtoKaminskaoftheFinancialTimes.Sheexplainedthatbanksmake

goodjudgmentsaboutwhomtolendtoandhowtoprocesspaymentswhenthey

havegoodaccesstoprivateinformation,andtheygetthatinformationby

promisingtokeepthesecret.Themoresecretstheyhold,thegreaterthe

informationasymmetryandthegreatertheiradvantages,butthoseadvantages

haveharmfulsystemicimplications.

Sowhat’stopreventhugecorporationsor

powerfulnation-statesfromcapturingblockchaintechnologiesfortheirown

narrowinterests?“Anyconsensusmechanismthatyouhaveisgoingtobe

susceptibletomarketing—wherepowerfulinterestsspendmoneytryingto

convincepeopletodoacertainthing,”saidPairofBitPay.

Tobeclear,wearenotsuggestingthatcorporationsandgovernmentsshould

leavethistechnologyalone.Afterall,blockchaintechnologyisemergingasan

importantglobalresourcethatcouldenablenewcapabilities.Moreover,society

needsgovernmentstodeliverservicesfortheircitizenryandcorporationsto

createjobsandwealth.Butthat’sdifferentfromcapturingadisruptive

technologyanditslargesseinwaysthatlimititsgreaterbenefitstosociety.

Alsoconsiderwhatthecoredevelopersandblockchaincompaniesare

alreadydoingtosecuretheirnetworks,anticipatingandrespondingquicklyto

worst-casescenarios.Forexample,in2014,thievesstoleeightmillion

VeriCoins,aproof-of-stakecryptocurrency,fromtheMintPalexchange.Within

daysoftheattack,VeriCoindevelopersreleasednewcodethatforkedthe

VeriCoinblockchainpriortothehack—inasense,theyrolledbacktime—and

collaboratedwithexchangestomakesureitwasadopted.

Similarly,“ifmoney

andpowerdotrytocapturethenetwork,theminerswouldstopthembygoingto

therealversionofbitcoinandinitiatingafork,”

accordingtoKeonne

Rodriguez,productleadatBlockchain.

What’stopreventChinafromaimingallitsstateprocessingassetsandallits

miningpoolsatthebitcoinblockchaintostagea51percentattackorat

minimumdestabilizetheprocess?Let’ssaysomewealthydespothasdecided

thatbitcoin,liketheInternetbeforeit,hasbecomesoinfluentialthatitiseroding

hispower.Thisdespotcouldseizealltheminingpowerwithinreachand

purchasetherestfromcountriesthatstilltoleratehisbadbehavior,toputhim

overthe50percenthashratethreshold.Hecouldthendecidewhichtransactions

toincludeinblocksandwhichtoreject.Withcontrollinginterest,hecouldalso

decidewhethertoforkthecodeandintroduceafewprohibitions,maybe

blacklistingaddressesassociatedwithgamblingorfreespeech.Sodohonest

nodesadoptthiscentrallycontrolledforkordotheyforkovertoanewcode?

AndrewVegetabile,directoroftheLitecoinAssociation,saidtherewasno

escapefromsuchascenariobecausethedespotcontrolled51percentofthe

network.Andheneedn’trepresentagovernment;hecouldbeoneoftheworld’s

wealthiestpeopleoranexecutiveofahighlyprofitablecompanywith

substantialpurchasingpower.

Athirdscenarioisthattheincumbentswilldefendtheirterritory,lobbyingto

makesureexistingregulationsforwell-establishedfirmsapplytosmallstart-

ups,andsuinganystart-upthatsurvivestheregulatoryinquisition.Thislitigate-

not-innovatestrategymaybuythemtimetosortoutastrategy.Oritmaysimply

draintheincumbentofwhateverrealvalueitcontains.Thinkofthosetwin

tyrants—legacysystemsandactiveinertia.Academicshavewelldocumented

theeffectsoflock-inandswitchingcostsandhaveidentifiedthechallengesof

postmergersystemsintegration.Organizationswithhugetechnology

investmentsintheirinstalledbasemaybemorelikelytothrowmoremoneyat

theiroldsystem,sharpeningtheirknivesforthepistolfightratherthan

conductingstrategicexperimentsontheblockchain.

5.THEINCENTIVESAREINADEQUATEFORDISTRIBUTEDMASS

COLLABORATION

Minersdohaveanincentivetomaintainthebitcoininfrastructurebecause,ifthe

networkfails,alltheunconvertedbitcointhey’dearned(orcouldearn)through

miningwouldbelostorworthlessorotherwiseatrisk.Beforewedigfurther

intoincentives,let’sbeclearabouttheservicethatminersprovide:itisnot

transactionvalidation.Everyfullnodecanvalidatetransactions.Rather,miners

preservethedistributionofpower—thepowertodecidewhichtransactionsto

includeineachblock,thepowertomintcoins,thepowertovoteonthetruth.

SOYOUWANNABEABITCOIN

MINER?

spartofourresearch,werecruitedBobTapscott—formerbank

CIO,managementconsultantatlarge,andDon’sbrother—to

downloadtheentirebitcoinblockchainstackandledgerinearly

2015.Theexperimentwasinstructiveintermsoftheelapsedtime,the

effortrequired,theenergyconsumed,andthe(lackof)payoffforhobby

miningofbitcoin.

Bobdedicatedhissparefour-thread,two-coreWindowsPCtothe

task.Downloadingtookafullthreedaysandconsumedonaverageabout

20percentoftheavailableprocessingpower.Miningusesslightlymore

than200MBofmemoryand10percentoftheCPUtostaycurrent.

AlthoughBob’scomputerwashardlyoptimizedforminingbitcoin,

heentereditintoaminingpool.Ina137-hoursession,itmined152.8

microbitcoin(μBTC),roughlythreeandahalfU.S.centsatthetime.But

attencentsperkilowatt-hour,Bob’scomputerusedaboutfourteencents

ofelectricity.Bobconcluded,“ThedaysofminingbitcoinsfromyourPC

arenowover.”

Soanydesignchangetotheoriginalbitcoinprotocol,whether

throughanaltcoinoranupgrade,mustkeepinmindappropriate

economicincentivestosustainminerdecentralization,sothatthenetwork

getsgoodvaluefromminersinexchangeforthelargesumsofbitcoin.

BitcoincoredeveloperPeterToddlikenedthistasktodesigningarobot

thatcanbuymilkatthegrocerystore.“Ifthatrobotdoesn’thaveanose,

beforelongstoreownersaregoingtorealizeitcan’ttellthedifference

betweenunspoiledandspoiledmilk,andyou’regoingtogetrippedoff

payingforabunchofspoiledmilk.”

ToTodd,thatmeansthatsmaller

minersingeographicallydispersedlocationsshouldbeabletocompete

nosetonosewithlargerminersthataregeographicallycentralized,that

is,largeminingpoolsinIcelandorChina.

Thequestioniswhetherthat’spossible.Becausethenumberofnew

bitcoinsmintedhalveseveryfouryears,whatwillhappenwhenthe

rewarddropstozero?Theminingcycledependsonthemarketpriceof

bitcoin.Whenthepricedrops,somebitcoinminersparktheirsupply,but

theycontinuetoplaythelotteryuntilthepriceincreases.Otherminers

can’taffordtoparkandplay;theyjustdry-docktheirminingrigsor

diverttheirprocessingpowertoanotheraltchainthatmightbemore

profitable.Stillothersjoinminingpools,poolingtheircomputingpower

withnodeswiththehopeofincreasingtheiroddsandatleastgetting

somefractionofthewinningsratherthannothingatall.Andthenthere’s

theindustrialbitcoinminingcomplex.ValeryVavilovofBitFury

estimatedthathisminingoperationwouldhaveatleast200megawatts’

capacitybytheendof2016.

Oneanswerischargingfees.Satoshiwrote,“Therewillbe

transactionfees,so[mining]nodeswillhaveanincentivetoreceiveand

includeallthetransactionstheycan.Nodeswilleventuallybe

compensatedbytransactionfeesalonewhenthetotalcoinscreatedhits

thepre-determinedceiling.”

Soonceallbitcoinshavebeenminted,afee

structurewilllikelyemerge.Thinkintermsofbillionsofnanopayments.

Becauseeachblockhasafixedmaximumsize,thereisalimittohow

manytransactionsaminercaninclude.Therefore,minerswilladd

transactionswiththehighestfeesfirst,leavingthosewithloworzerofees

tofightforwhateverspacemightbeleftover.Ifyourtransactionfeeis

highenough,youcanexpectaminertoincludeitinthenextblock;butif

thenetworkisbusyandyourfeeistoolow,itmighttaketwo,three,or

moreblocksbeforeaminereventuallyrecordsintheblockchain.

Whatdoesthatmeanforpeoplewhocan’taffordfeesnow?Won’t

levyingfeeslowertheblockchain’sadvantageovertraditionalpayment

methods?AccordingtoventurecapitalistPascalBouvier,the“feesreflect

themarginalcostofverifyingatransaction.”Withoutfeestoincentivize

miners,astheblockrewardkeepshalving,thehashratewouldlikely

drop.Ifthehashratedrops,networksecuritydeclines.

Thatleadsusbacktothe51percentattack,whereahugeminingpool

oracarteloflargeminingpoolscontrolled51percentofthehashrate.

Withthatmuchfirepower,theywouldconstituteamajorityvoteof

minersandcouldhijackblockgenerationandforcetheirversionofthe

truthonthebitcoinnetwork.Theywouldn’tnecessarilygetrich.Farfrom

it.Alltheycoulddoistoreversetheirowntransactionswithinaprevious

block,ratherlikeacreditcardchargeback.Let’ssaytheattackersbought

somebig-ticketitemfromthesamemerchant,waiteduntilitshipped,

thenattackedthenetworktogettheirmoneyback.Thatwouldn’tmean

tackingitsownblocktotheendoftheblockchain.Thatwouldmean

goingbackandredoingtheblockthatcontainedalltheirpurchasesas

wellasallsubsequentblocks,evenasthenetworkcontinuestogenerate

newblocks.Whenthecartel’sbranchbecamelonger,itwouldbecomethe

newvalidone.Satoshibetonthatbeingwildlymorecostlythanmining

newcoins.

Where51percentattacksonproof-of-workmodelsstemfrom

concentratedminingpower,attacksonproof-of-stakemodelscomefrom

concentratedcoincontrol,andcoinexchangesaretypicallythebiggest

stakeholders.Insomejurisdictions,exchangesmustbelicensedandare

underregulatoryscrutiny.Theyalsohavereputationatstake,andsothey

havemultipleincentivestoprotectthevalueoftheirbrandandthevalue

ofthecoinsheldinaccountwallets.However,withmorecoinsin

circulation,agreaterdiversityofvalue,andmorestrategicassets

registeredonPoWandPoSblockchains,anattackermaynotcareabout

anyofthesecosts.

6.THEBLOCKCHAINISAJOBKILLER

Atthe2015WorldEconomicForumannualmeetinginDavos,Switzerland,a

paneloftechnologyexecutivesfromMicrosoft,Facebook,andVodaphone

discussedtheimpactoftechnologyonjobs.Allagreedthat,although

technologicalinnovationsmaydisruptlabormarketstemporarily,overallthey

generatenewandincrementallymorejobs.“Whyshouldthistimebeany

different?”saidEricSchmidt,executivechairofGoogle.

Thedisplacementofworkersthroughautomationisnothingnew.Consider

theInternet’simpactontravelagentsandmusicretailers.UberandAirbnbhave

createdincomefordriverswithextratimeandhomeownerswithsparerooms,

butneitherprovideshealthinsuranceorotheremployeebenefits,andbothare

displacingbetter-paidjobsinthetravelandhospitalityindustries.

Theblockchainisanextraordinaryplatformforradicalautomation,where

computercoderatherthanhumansdothework,managingassetsandpeople.

WhathappenswhenautonomousvehiclesreplaceUberdrivers?Ordigital

currenciesobviateWesternUnion’sfivehundredthousandpointsofsalearound

theworld.

Orwhenasharedblockchainplatformforfinancialservices

eliminatestensofthousandsofaccountingandITsystemsmanagementjobs?

Whiletherewillbemanynewbusinessandemploymentopportunitiescreated

throughtheIoT,willitdrivefurtherunemployment,especiallyintherelatively

unskilledmarketforrelativelyroutinetasks?

Inthedevelopingworld,theblockchainandcryptocurrenciescouldenable

entrepreneurstoraisecapital,protectassetsandintellectualproperty,andcreate

jobseveninthepoorestcommunities.Hundredsofmillionscouldbecome

microshareholdersinnewcorporationsandparticipateineconomicexchange.

Thetechnologycouldradicallyimprovethedeliveryanddeploymentofaid,

increasegovernmenttransparency,reducecorruption,andsettheconditionsfor

goodgovernment—apreconditionforjobsinmanypartsoftheworld.

Eveninthedevelopedworldtheeffectsarenotdeterminable.Aglobal

platformthatdropstransactioncosts,inparticularthecostsofestablishing

trustedcommerceandwealthcreation,couldresultinmoreparticipants.

Evenifthistechnologyenablesustodomorewithfewerhumanresources,

westillhavenocasetofear,delay,orhaltitsmarch.Ultimately,whatmattersis

notwhethernewcapabilitiesexistbuttheextenttowhichsocietiesturnthese

intosocialbenefit.Ifmachinesarecreatingsomuchwealth,thenmaybeit’stime

foranewsocialcontractthatredefineshumanworkandhowmuchtimewe

shouldallspendmakingaliving.

7.GOVERNINGTHEPROTOCOLSISLIKEHERDINGCATS

Howshouldwestewardthisnewresourcetofulfillitspotential?Unlikethe

Internet,thebitcoincommunitydoesnotyethaveformaloversightbodiessuch

asICANN,theInternetEngineeringTaskForce,ortheWorldWideWeb

Consortiumtoanticipatedevelopmentneedsandguidetheirresolution—andthe

communityprefersitthatway.Thatpresentsuncertainty.Peoplewhowantto

keeptheblockchaindecentralized,open,andsecurecan’tagreeonaway

forward.Ifwedon’taddressgovernance,thenthemovementcouldcollapseon

itselfasitdisintegratesintowarringfactions.

Therearecountlessissues.BitcoincoredevelopersGavinAndresenand

MikeHearnhavebeenadvocatingforanincreaseinblocksizefromone

megabyteofdatatoaslargeastwentymegabytes.Bitcoinisnot“atokenfor

richpeopletotradebackandforth....Itisapaymentnetwork,”said

Andresen.

Theyarguethatifbitcoinisevertocompeteseriouslyasaglobal

paymentmechanism,thenithastoprepareformainstreamadoption.Itcouldn’t

grindtoahaltonedaywhentransactionflowsuddenlysurpassedblockchain

capacity.Feeswouldskyrocketforpeoplewhodidn’twanttowaitmonthsor

yearsfortheirtransactionstosettle.Orperhapssomecentralpowerwouldstep

in,intheinterestofconsumerprotection,andprocesstheoverflow.InAugust

2015,theywentaheadandlaunchedBitcoinXT,aforkoftheblockchainthat

allowsforeight-megabyteblocks.Itisstillacontroversialcompromise.

Opponentsarguethatpeopleshouldn’tbeusingbitcointobuytheirventi

lattesatStarbucks.“Somedeveloperswanteverysinglepersonintheworldto

berunningafullyvalidatingnodethatseeseverysingletransactionandhas

absolutelynotrustonanybodyelse,”saidAndresen.“Thevolunteercontributors

whohavebeenactuallymakingthesoftwareworkforthelastfewyearsare

worriedthattheypersonallymaynotbeabletohandlelargerblocksif

transactionvolumerampsup....Idon’thaveawholelotofsympathyfor

that.”

Inotherwords,ifthebitcoinblockchainistoscaleandremainsecure,

thenwecan’thaveitbothways.Somenodeswillrunfullprotocolsandprocess

moretransactionsintoincreasinglylargerblocks,andotherswillrunsimplified

paymentverificationmodelsandtrustthat51percentoffullnodesgetitright.

ThebiggestpushbackagainstBitcoinXTcamefromtheminingpoolsin

China.Seriousbitcoinminers,likehard-coreonlinegamers,neednotonly

seriouslypowerfulcomputerstofindacorrecthashbutalsoseriouslyhigh-speed

bandwidthtobroadcastitquicklyacrossthenetwork.Chinaisanexceptionto

Nielsen’slawofInternetbandwidth:bandwidthdoesn’tincreaseby50percent

eachyear.Iftheblocksizeincreaseistoolarge,itwouldputlow-bandwidth

Chineseminersatadisadvantagecomparedwithminersinotherpartsofthe

world.Receivingnewblockstobuilduponwouldtakelonger;andwhenthey

didfindanewblock,theywouldtakelongertosenditouttotherestofthe

network.Thesedelayswouldultimatelyresultinthenetwork’srejectingsomeof

theirblocks.Theywouldloseouttominerswithmorebandwidthwhoseblocks

propagatedfaster.

“Tryingtobootstraporchangeanetworkprotocolisjustamonumental

task,”saidAustinHill.“Youjustdon’twanttobemakingchangesadhocor

veryfastonanecosystemthat’smanaginganywherefromthreetotenbillion

dollars’worthofpeople’swealthandassets.”

Attheendoftheday,said

Andresen,“Thatgovernancemodelisdrivenverymuchbywhatcodethepeople

actuallywanttorun,whatstandardspeoplewanttoimplementintheequipment

theysell.”Hesaidthatbitcoin,liketheInternet,will“haveasimilarmessy,

chaoticgovernanceprocessthatwilleventuallycomedowntowhatcodesthe

peoplechoosetorun.”

Again,we’renottalkingaboutregulatingbutaboutstewardingthisresource

forviabilityandsuccess.Governanceincludessettingstandards,advocatingand

adoptingsensiblepolicies,developingknowledgeaboutthetechnology’s

potential,performingwatchdogfunctions,andactuallybuildingouttheglobal

infrastructure.Wediscussamultistakeholdergovernancemodelinthenext

chapter.

8.DISTRIBUTEDAUTONOMOUSAGENTSWILLFORMSKYNET

Therearehighlydistributedenterpriseswitharangeofgoodandbadactors.

Anonymous,adistributedaffinitygroupofvolunteers,consistsofcorporate

saboteurs,whistleblowers,andwatchdogs.Withtheblockchain,Anonymous

couldcrowdsourcebitcoinandholdthesefundsinawallet.Let’ssayagroupof

Frenchshareholderswouldliketogivethatmoneytoafewassassinswhowould

trackdownandkillofftheunaccounted-forterroristsresponsiblefortheParis

massacre.They’dneedthousandsofsignatoriestoreachconsensusandrelease

thefunds.Inthisscenario,wholegallycontrolsthosefunds?Whoisresponsible

fortheoutcomeofthattransaction?Ifyou’vecontributedoneten-thousandthof

avote,whatisyourlegalliability?

Ifvendingmachinesareprogrammedtoorderthemostprofitableproducts,

willtheydiscoverasupplierforillegalgoodsordrugs?(Hey,thecandymachine

issellingEcstasy!)Howshouldthelawhandleanautonomousvehiclethat

accidentallykillsahumanbeing?ForWiredmagazine,twohackers

demonstratedhowtohijackthecontrolsystemsofaJeepCherokeeonthe

highway.Chryslerrespondedbyrecalling1.4millionvehiclesandalarming

drivers,manufacturers,andpolicymakersalike.

Couldterroristsfigureouthow

tohacksmartdevicessothattheyperformedunwantedactionswithdevastating

consequences?

Thereareotherchallengeswithdistributedmodelsoftheenterprise.How

doessocietygoverntheseentities?Howcanownerskeepultimatecontrol?How

dowepreventhostiletakeoversofpersonlessbusinesses?Let’ssayweowna

decentralizedWebhostingcompanywhereeachoftheservershasasayin

companymanagement.Ahumanhackerorsomemalwarecouldpretendtobea

millionserversandoutvotethelegitimateserversinthenetwork.Whensuch

takeoversoftraditionalcompaniesoccur,theresultscanvary.WithaDAE,the

resultswillmostlikelybedisastrous.Oncethatmalevolententitycontrolsour

distributedWebhostingcompany,itcouldcashout.Oritcouldreleasethe

privatedatafromotherserversorholdthedatahostageuntilwehumanowners

paidaransom.

Oncemachineshaveintelligenceandtheabilitytolearn,howquicklywill

theybecomeautonomous?Willmilitarydronesandrobots,forexample,decide

toturnoncivilians?AccordingtoresearchersinAI,we’reonlyyears,not

decades,awayfromtherealizationofsuchweapons.InJuly2015,alargegroup

ofscientistsandresearchers,includingStephenHawking,ElonMusk,andSteve

Wozniak,issuedanopenlettercallingforabanonthedevelopmentof

autonomousoffensiveweaponsbeyondmeaningfulhumancontrol.

“Thenightmareheadlineformeis,‘100,000RefrigeratorsAttackBankof

America,’”saidVintCerf,widelyregardedasthefatheroftheInternet.“Thatis

goingtotakesomeseriousthinkingnotonlyaboutbasicsecurityandprivacy

technology,butalsohowtoconfigureandupgradedevicesatscale,”headded,

notingthatnoonewantstospendtheirentireweekendtypingIPaddressesfor

eachandeveryhouseholddevice.

WedonotrecommendbroadregulationofDAEsandtheIoTorregulatory

approvals.Wedorecommendthatmanagersandentrepreneurswhoare

developingappsidentifyanysignificantpublicimpacts—good,bad,orneutral—

andaltersourcecodeanddesigns.Wethinktheyshouldconsultwiththoselikely

affectedbytheircreationstominimizerisksinadvance,identifyalternative

pathsforward,andbuildsupport.

9.BIGBROTHERIS(STILL)WATCHINGYOU

“Therewillbemanyattemptstocontrolthenetwork,”saidKeonneRodriguezof

Blockchain.“Bigcompaniesandgovernmentswillbedevotedtobreakingdown

privacy.TheNationalSecurityAgencymustbeactivelyanalyzingdatacoming

throughtheblockchain”evennow.

Whileblockchainsensureadegreeof

anonymity,theyalsoprovideadegreeofopenness.Ifpastbehaviorisany

indicationoffutureintent,thenweshouldexpectcorporationsknownforspying

andcountriesknownforwagingcyberwarfaretoredoubletheireffortsbecause

valueisinvolved—money,patents,accesstomineralrights,thetitlestolandand

nationaltreasures.It’sasifwe’veplacedabigbull’s-eyeontopoftheInternet.

Thegoodnewsisthateveryonewillbeabletoseetheshenanigans.Somemay

behighlymotivatedto“out”spying,becausetheybetonthelikelihoodofa

particularregime’sattackingtheblockchaininapredictionmarket.

Whathappenstoprivacywhenthephysicalworldstartscollecting,

communicating,andanalyzinginfinitedatathatcoulddoganindividualforever?

Ina2014presentationatWebstock,MaciejCeglowskirantedaboutGoogle’s

acquisitionofNest,amakerofluxurythermostatswithsensorsthatcollectdata

aboutrooms.Hisoldthermostatdidn’tcomewithaprivacypolicy.Thissmart

thermostatcouldreportbacktoGoogle,maybeeveneathisleftoverpizzalikea

sketchyroommate.

Manyofusarealreadyuncomfortablewithasocialmedia

environmentthattracksourwhereaboutsandbarragesuswithpersonalized

marketingmessageswhereverwego.Intheblockchainworld,we’llhavebetter

controloversuch,butwillwebevigilantenoughtomanageourmediadiet?

Noneoftheseprivacychallengesaretrueshowstoppers.Continued

Ceglowski:“Thegoodnewsis,it’sadesignproblem!WecanbuildanInternet

that’sdistributed,resilient,irritatingtogovernmentseverywhere,andfreeinthe

bestsenseoftheword,”aswewantedittobeinthe1990s.AnnCavoukianof

thePrivacyandBigDataInstituteoutlinedsevenprinciplesfordesignthatare

“goodforbusiness,goodforgovernment,goodforthepublic.”Thefirstis

critical:makeprivacythedefaultsetting.Rejectfalsedichotomiesthatpit

privacyagainstsecurity;everyITsystem,everybusinesspractice,andall

infrastructureshouldhavefullfunctionality.Leadersneedtopreventratherthan

reacttoviolations,maintaintransparencyinalloperations,andsubjecttheir

organizationstoindependentverification.Brandswillearnpeople’strustby

respectinguserprivacy,keepingusersatthecenterofdesign,andensuringend-

to-endsecurityoftheirdata,destroyingitwhennolongerneeded.Shesaid,“It

reallyisawin-winproposition,rejectingzero-sumandembracingpositive-

sum.”

SaidCeglowski,“Butitwilltakeeffortanddetermination.Itwillmean

scrappingpermanentmasssurveillanceasabusinessmodel,whichisgoingto

hurt.Itwillmeanpushinglawsthroughascleroticlegalsystem.Therewillhave

tobesomenagging.Butifwedon’tdesignthisInternet,ifwejustcontinueto

builditout,theneventuallyitwillattractsomeremarkable,visionarypeople.

Andwe’renotgoingtolikethem,andit’snotgoingtomatter.”

10.CRIMINALSWILLUSEIT

Initsearlydays,naysayersoftencondemnedbitcoinasatoolforlaundering

moneyorbuyingillicitgoods.Criticsarguedthat,becausethetechnologyis

decentralized,lightningquick,andpeertopeer,criminalswouldexploitit.

Chancesare,you’veheardofSilkRoad,thedarkWebmarketplaceforillegal

drugs.AtitspeakinOctober2013,SilkRoadhad13,756listingspricedin

bitcoin.Productsweredeliveredbymailwithaguidetoavoidingdetectionby

authorities.WhentheFBIseizedthesite,thepriceofbitcoinplummetedand

digitalcurrenciesbecamesynonymouswithcrime.Itwasbitcoin’sdarkesthour.

Butthereisnothinguniquetobitcoinorblockchaintechnologythatmakesit

moreeffectiveforcriminalsthanothertechnologies.Authoritiesingeneral

believethatdigitalcurrenciescouldhelplawenforcementbyprovidingarecord

ofsuspiciousactivities,maybeevensolvingamultitudeofcybercrimes,from

financialservicestotheInternetofThings.MarcGoodman,authorofFuture

Crimes,arguedrecently,“There’sneverbeenacomputersystemthat’sproven

unhackable.”

Opportunitiesforcrimehavescaledwithtechnology.“The

abilityofonetoaffectmanyisscalingexponentially—andit’sscalingforgood

andit’sscalingforevil.”

Sothisfallsunderthecategoryofhumanbeings

wantingtoharmotherhumanbeings.Criminalswillusethelatesttechnologyto

doit.

However,bitcoinandblockchaintechnologycoulddiscouragecriminaluse.

First,evencriminalsmustpublishalltheirbitcointransactionsintheblockchain,

andsolawenforcementcantrackpaymentsinbitcoinmoreeasilythancash,still

thedominantpaymentmediumforcriminals.TheoldWatergateadage,“follow

themoney”tofindthecrook,isactuallymoredoableontheblockchainthan

withotherpaymentmethods.Bitcoin’spseudonymousnaturehasregulators

dubbingbitcoins“prosecutionfutures”becausetheycanbetrackedand

reconciledmoreeasilythancash.

AftereachmassshootinginAmerica,U.S.representativeswhose

constituentsandcampaignfundersarecard-carryingmembersoftheNational

RifleAssociationarequicktosay,“Don’tblamegunsforallthegunviolencein

America!”Itwouldbeveryrichindeedifthesesamepeoplebannedblockchain

technologybecauseofthecrimessomepeoplemightcommitonit.Technology

doesnothaveagency.Itdoesnotwantforanythingorhaveaninclinationone

wayortheother.Moneyisatechnology,afterall.Whensomeonerobsabank,

wedon’tblamethemoneythatsitsinthevaultfortherobbery.Thefactthat

criminalsusebitcoinspeaksmoretothelackofstronggovernance,regulation,

advocacy,andeducationthantoitsunderlyingvirtues.

REASONSBLOCKCHAINWILLFAILORIMPLEMENTATION

CHALLENGES?

Sotheobstaclesareformidable.Loominginthedistanceisquantumcomputing,

thecryptographer’sY2Kproblem.Itcombinesquantummechanicsand

theoreticalcomputationtosolveproblems—suchascryptographicalgorithms—

vastlyfasterthantoday’scomputers.SaidSteveOmohundro,“Quantum

computers,intheory,canfactorverylargenumbersveryrapidlyandefficiently,

andmostofthepublickeycryptographysystemsarebasedontaskslikethat.

Andsoiftheyturnouttobereal,thenthewholecryptographyinfrastructureof

theworldisgoingtohavetochangedramatically.”

Thedebateover

technologicalinnovationandprogressisanancientone:Isthetoolgoodorbad?

Doesitadvancethehumanconditionordegradeit?AssatiristJamesBranch

Cabellobserved,“Theoptimistproclaimsthatweliveinthebestofallpossible

worlds.Thepessimistfearsthisistrue.”

AsthestoryofLevTermenshows,individualsandorganizationscanuse

innovationsforgoodandforevil,andthathasbeentrueacrossabroadrangeof

technologies,fromelectricitytotheInternet.YochaiBenkler,authorofthe

seminalworkTheWealthofNetworks,toldus,“Technologyisnotsystematically

biasedinfavorofinequalityandstructureofemployment;thatisafunctionof

social,political,andculturalbattles.”Whiletechnologycanchangebusinessand

societydramaticallyandswiftly,Benklerbelievesitis“notinadeterministic

way,onewayortheother.”

Inbalance,thearcoftechnologicalhistoryhasbeenapositiveone.Consider

themanyadvancesinfoodandmedicine,fromR&Dtotreatmentand

prevention:technologyhasmadeforgreaterhumanequity,productivecapability,

andsocialprogress.

Thereisnothingtosuggestblockchaincouldn’tfallintothesametrapasthe

Internetdid.Itmayberesistanttocentralizationandcontrol;butiftheeconomic

orpoliticalrewardsaregreatenough,powerfulforceswilltrytocaptureit.

Leadersofthisnewdistributedparadigmwillneedtostaketheirclaimand

initiateawaveofeconomicandinstitutionalinnovationinordertoensurethat

everyonehastheopportunity.Thistime,let’sfulfillthepromise.Whichbrings

ustotheissueofmakingallthishappen.

CHAPTER11



LEADERSHIPFORTHENEXTERA

rolificisanadjectivethatshouldprecedealltitlesusedtodescribetwenty-

one-year-oldVitalikButerin,theRussian-bornCanadianfounderof

Ethereum.(Prolificfounder,thatis.)Askhislegionoffollowersabout

Ethereum,andthey’lltellyouit’sa“blockchain-based,arbitrary-state,Turing-

completescriptingplatform.”

IthasattractedIBM,Samsung,UBS,Microsoft,

andtheChineseautogiantWanxiang,andanarmyofthesmartestsoftware

developersintheworld,allofwhomthinkthatEthereummaybethe“planetary

scalecomputer”thatchangeseverything.

WhenButerinexplained“arbitrary-state,Turing-complete”tous,wegota

glimpseofhismind.Listeningtomusicisverydifferentfromreadingabookor

calculatingtheday’srevenuesandexpenses,andyetyoucandoallthreeonyour

smartphone,becauseyoursmartphone’soperatingsystemisTuringcomplete.

ThatmeansthatitcanaccommodateanyotherlanguagethatisTuringcomplete.

SoinnovatorscanbuildjustaboutanydigitalappimaginableonEthereum—

appsthatperformverydissimilartasks,fromsmartcontractsandcomputational

resourcemarketplacestocomplexfinancialinstrumentsanddistributed

governancemodels.

Buterinisapolyglot.HespeaksEnglish,Russian,French,Cantonese(which

helearnedintwomonthsonvacation),ancientLatin,ancientGreek,BASIC,

C++,Pascal,andJava,tonameafew.

“Ispecializeingeneralism,”hesaid.He

isalsoapolymath,andamodestoneatthat.“Ihadallthesedifferentinterests,

andsomehowbitcoinseemedlikeaperfectconvergence.Ithasitsmath.Ithas

itscomputerscience.Ithasitscryptography.Ithasitseconomics.Ithasits

politicalandsocialphilosophy.ItwasthiscommunitythatIwasimmediately

drawninto,”hesaid.“Ifounditreallyempowering.”Hewentthroughtheonline

forums,lookedforwaystoownsomebitcoin,anddiscoveredaguywhowas

startingupabitcoinblog.“ItwascalledBitcoinWeekly,andhewasoffering

peoplefivebitcoinstowritearticlesforhim.Thatwasaroundfourdollarsatthe

time,”Buterinsaid.“Iwroteafewarticles.Iearnedtwentybitcoins.Ispenthalf

ofthemonaT-shirt.Goingthroughthatwholeprocess,itfeltalmostlike

workingwiththefundamentalbuildingblocksofsociety.”

Allthisfromamanwho,nearlyfiveyearsearlier,haddismissedbitcoin.

“AroundFebruary2011,mydadmentionedtome,‘Haveyouheardofbitcoin?

It’sthiscurrencythatexistsonlyontheInternetandit’snotbackedbyany

government.’Iimmediatelythought,‘Yes,thisthinghasnointrinsicvalue,

there’snowayit’sgoingtowork.’”Likemanyteenagers,Buterin“spent

ridiculousamountsoftimeontheInternet,”readingaboutdifferentideasthat

wereheterodox,outofthemainstream.Askhimwhicheconomistshelikes,and

herattlesoffTylerCowen,AlexTabarrok,RobinHanson,andBryanCaplan.He

canspeakontheworksofgametheoristThomasSchellingandbehavioral

economistsDanielKahnemanandDanAriely.“It’sactuallysurprisinglyuseful,

howmuchyoucanlearnforyourselfbydebatingideaslikepoliticswithother

peopleonforums.It’sasurprisingeducationalexperienceallbyitself,”hesaid.

Bitcoinkeptcomingup.

Bytheendofthatyear,Buterinwasspendingtentotwentyhoursaweek

writingforanotherpublication,BitcoinMagazine.“WhenIwasabouteight

monthsintouniversity,Irealizedthatithadtakenovermyentirelife,andI

mightaswellletittakeovermyentirelife.Waterloowasareallygood

universityandIreallylikedtheprogram.Mydroppingoutwasdefinitelynota

caseoftheuniversitysucking.Itwasmoreamatterof,‘Thatwasfun,andthisis

morefun.’Itwasaonce-in-a-lifetimeopportunityandIjustbasicallycouldn’tlet

itgo.”Hewasonlyseventeenyearsold.

ButerincreatedEthereumasanopensourceprojectwhenherealizedthat

blockchainscouldgofarbeyondcurrencyandthatprogrammersneededamore

flexibleplatformthanthebitcoinblockchainprovided.Ethereumenablesradical

opennessandradicalprivacyonthenetwork.Heviewsthesenotasa

contradictionbutas“asortofHegeliansynthesis,”adialecticbetweenthetwo

thatresultsin“volunteeredtransparency.”

Ethereum,likesomanytechnologiesthroughouthistory,coulddislocate

jobs.Buterinbelievesthisisanaturalphenomenoncommontomany

technologiesandsuggestsanovelsolution:“Withinahalfcentury,wewillhave

abandonedthemodelthatyoushouldhavetoputineighthoursoflaborevery

daytobeallowedtosurviveandhaveadecentlife.”

However,whenitcomes

toblockchain,he’snotconvincedthatmassivejoblossesareinevitable.

Ethereumcouldcreatenewopportunitiesforvaluecreationand

entrepreneurship.“Whereasmosttechnologiestendtoautomateworkersonthe

peripherydoingmenialtasks,blockchainsautomateawaythecenter,”hesaid.

“Insteadofputtingthetaxidriveroutofajob,blockchainputsUberoutofajob

andletsthetaxidriversworkwiththecustomerdirectly.”Blockchaindoesn’t

eliminatejobssomuchasitchangesthedefinitionofwork.Whowillsuffer

fromthisgreatupheaval?“Isuspectandhopethecasualtieswillbelawyers

earninghalfamilliondollarsayearmorethananyoneelse.”

SoButerinknows

hisShakespeare:“Thefirstthingwedo,let’skillallthelawyers.”

Ethereumhasanotherapparentcontradiction.Itisunabashedly

individualisticandprivateandyetitdependsuponalarge,distributed

communityactingopenlyincollectiveself-interest.Indeed,Ethereum’sdesign

neatlycapturesbothhisenduringfaiththatindividualswilldotherightthing

whenequippedwiththerighttools,andhishealthyskepticismofthemotivesof

largeandpowerfulinstitutionsinsociety.WhileButerin’scritiqueofthe

problemsofcontemporarysocietyisgrave,histoneisclearlyoneofhope.

“Whiletherearemanythingsthatareunjust,Iincreasinglyfindmyself

acceptingtheworldasis,andthinkingofthefutureintermsofopportunities.”

Whenhelearnedthat$3,500wouldenablesomeonetocombatmalariatherest

ofherlife,hedidn’tbemoanthelackofdonationsfromindividuals,

governments,andcorporations.Hethought,“Ohwow,youcansavealifefor

only$3,500?That’sareallygoodreturnoninvestment!Ishoulddonatesome

rightnow.”

Ethereumishistooltoeffectpositivechangeintheworld.“Isee

myselfmoreaspartofthegeneraltrendofimprovingtechnologysothatwecan

makethingsbetterforsociety.”

Buterinisanatural-bornleader,inthathepullspeoplealongwithhisideas

andhisvision.He’sthechiefarchitect,chiefachieverofconsensusinthe

Ethereumcommunity,andchiefcultivatorofabroadercommunityofbrilliant

developerswhohavestrongopinionsaboutanythingtechnical.Whatifhe

succeeds?

WHOWILLLEADAREVOLUTION?

In1992,MITcomputerscientistDavidClarksaid,“Werejectkings,presidents,

andvoting.Webelieveinroughconsensusandrunningcode.”

Thatwasthe

mantraforstewardsofthefirstgenerationoftheInternet.Itwasvoicedatatime

whenmostpeoplecouldscarcelyimaginehowtheInternetwouldbecomeanew

mediumofhumancommunications,onethatwouldarguablysurpassprevious

mediainitsimportanceforsocietyanddailylife.Clark’swordsembodieda

philosophyfortheleadershipandgovernanceofaglobalresourcethatwas

radicallydifferentfromthenorm,yetonethatengenderedaremarkablyeffective

governanceecosystem.

SincetheendofWorldWarII,state-basedinstitutionshavegoverned

importantglobalresources.Twoofthemostpowerful—theInternational

MonetaryFundandtheWorldTradeOrganization—werebornattheBretton

WoodsConferencein1944.TheUnitedNationsandothergroupsunderits

umbrella,suchastheWorldHealthOrganization,receivedawideberthto

exercisetheirmonopolyonglobalproblemsolving.Theseorganizationswere

hierarchicalbydesign,becausehierarchieswerethedominantparadigmduring

thefirsthalfofawar-torncentury.Buttheseindustrial-scalesolutionsareill

suitedtothechallengesofthedigitalera.TheriseoftheInternetmarkeda

significantdeparturefromthetraditionalcultureofgovernance.

In1992,mostInternettrafficwase-mail.Thegraphicalbrowserthatenabled

TimBerners-Lee’sextraordinaryWorldWideWebwastwoyearsaway.Most

peopleweren’tconnectedanddidn’tunderstandthetechnology.Manyofthe

importantinstitutionsthatwouldcometostewardthisimportantglobalresource

wereeitherembryonicornonexistent.BarelyfouryearsoldwastheInternet

EngineeringTaskForce,aninternationalcommunitythathandlesmanyaspects

ofInternetgovernance.TheInternationalCorporationforAssignedNamesand

Numbers(ICANN),whichdeliversessentialservicessuchasdomainnames,

wassixyearsawayfromexistence;andVintCerfandBobKahnwerejust

recruitingpeopleforwhatwouldultimatelybecometheInternetSociety.

ThesecondgenerationoftheInternetenjoysmuchofthesamespiritand

enthusiasmforopennessandaversiontohierarchies,manifestedintheethosof

Satoshi,Voorhees,Antonopoulos,Szabo,andVer.Opensourceisagreat

organizingprinciplebutit’snotamodusoperandiformovingforward.Asmuch

asopensourcehastransformedmanyinstitutionsinsociety,westillneed

coordination,organization,andleadership.OpensourceprojectslikeWikipedia

andLinux,despitetheirmeritocraticprinciples,stillhavebenevolentdictatorsin

JimmyWalesandLinusTorvalds.

Tohiscredit,SatoshiNakamotoalignedstakeholderincentivesbycoding

principlesofdistributedpower,networkedintegrity,indisputablevalue,

stakeholderrights(includingprivacy,security,andownership),andinclusiveness

intothetechnology.Asaresult,thetechnologyhasbeenabletothriveinthe

earlyyears,blossomingintotheecosystemweknowtoday.Still,thisdeistic

hands-offapproachisstartingtoshowsignsofstrain.Aswithalldisruptive

technologies,therearecompetingviewsintheblockchainecosystem.Eventhe

coreblockchaincontingenthassplitintodifferentcryptocamps,eachadvocating

aseparateagenda.

BrianForde,theformerWhiteHouseinsiderandblockchainadvocatewho

nowheadsMIT’sDigitalCurrencyInitiative,said,“Ifyoulookattheblock-size

debate,isitreallyadebateaboutblocksize?Inthemedia,it’sadebateabout

blocksize,butIthinkwhatwe’reseeingisthatit’salsoadebateon

governance.”

Whatkindofgovernance,andmorespecifically,whatkindof

leadershipisneeded?Indeed,MikeHearn,aprominentbitcoincoredeveloper,

causedquiteastirinJanuary2015,whenhewroteafarewelllettertothe

industryforetellingbitcoin’simminentdemise.Init,heoutlinedafewpressing

challengesfacingtheindustry;namely,thatimportanttechnicalstandards

questionshadgoneunansweredandthattherewasdiscordandconfusioninthe

ranksofthecommunity.Hearn’sconclusionwasthatthesechallengeswould

causebitcointofail.Wedisagree.Indeed,whatHearnintendedasadamning

critiqueofbitcoin’sshortcomingsbecame,inoureyes,oneofthemosteloquent

treatisesontheimportanceofmultistakeholdergovernance,basedon

transparency,merit,andcollaboration.Codealoneisjustatool.Forthis

technologytoreachitsnextstageandfulfillitslong-termpromise,humansmust

lead.Wenowneedallconstituents—allstakeholdersinthenetwork—tocome

togetherandaddresssomemission-criticalissues.

We’vealreadyoutlinedsomeoftheshowstoppers.Theyaresignificant.But

theyarechallengestothisrevolution’ssuccess,notreasonstoopposeit.Todate,

manyissuesarestillunsolvedandmanyquestionsunanswered,withlittle

collectivemovementtoresolvethem.Howwillthetechnologyscale,andcanwe

scaleitwithoutdestroyingthephysicalenvironment?Willpowerfulforces

chokeinnovationorco-optit?Howwillweresolvecontroversialstandards

questionswithoutrevertingtohierarchy?

Howtoanswerthosequestionshasbeenthefocusofourresearchoverthe

lasttwoyears.Wefoundthat,insteadofstate-basedinstitutions,weneed

collaborationsofcivilsociety,privatesector,government,andindividual

stakeholdersinnonstatenetworks.Callthemglobalsolutionnetworks(GSNs).

TheseWeb-basednetworksarenowproliferating,achievingnewformsof

cooperation,socialchange,andeventheproductionofglobalpublicvalue.

OneofthemostimportantistheInternetitself—curated,orchestrated,and

otherwisegovernedbyaonce-unthinkablecollectionofindividuals,civilsociety

organizations,andcorporations,withthetacitandsometimesactivesupportof

nation-states.Butnogovernment,country,corporation,orstate-basedinstitution

controlstheInternet.Itworks.Indoingso,ithasproventhatdiverse

stakeholderscaneffectivelystewardaglobalresourcebyinclusiveness,

consensus,andtransparency.

Thelessonsareclear.Goodgovernanceofsuchcomplexglobalinnovations

isnotthejobofgovernmentalone.Norcanweleaveittotheprivatesector:

commercialinterestsareinsufficienttoensurethatthisresourceservessociety.

Rather,weneedallstakeholdersgloballytocollaborateandprovideleadership.

THEBLOCKCHAINECOSYSTEM:YOUCAN’TTELLTHEPLAYERS

WITHOUTAROSTER

Althoughblockchaintechnologyemergedfromtheopensourcecommunity,it

quicklyattractedmanystakeholders,eachwithdifferentbackgrounds,interests,

andmotives.Developers,industryplayers,venturecapitalists,entrepreneurs,

governments,andnongovernmentorganizationshavetheirownperspectives,

andeachhasaroletoplay.Thereareearlysignsthatmanyofthecore

stakeholdersseetheneedforleadershipandaresteppingup.Let’sreviewwho

theplayersare:

BlockchainIndustryPioneers

Vanguardsintheindustry,fromErikVoorheestoRogerVer,believeanyformof

formalgovernance,regulation,stewardship,oroversightisnotonlyfoolish,but

antitheticaltotheprinciplesofbitcoin.

SaidVoorhees,“Bitcoinisalreadyvery

wellregulatedbymathematics,whicharenotuptothewhimsof

governments.”

However,astheindustryhasexpanded,manyentrepreneursare

seeingahealthydialoguewithgovernments,andafocusongovernancemore

broadly,asagoodthing.CompanieslikeCoinbase,Circle,andGeminihave

joinedtradeorganizations;andsomeevenmaintaincloserelationswith

emerginggovernanceinstitutions,suchastheDigitalCurrencyInitiativeatMIT.

VentureCapitalists

WhatstartedasacliqueofcryptoinsidersquicklysnowballedintoSilicon

Valley’sbiggestandbrightestVCs,includingthevenerableAndreessen

Horowitz.Nowfinancialservicestitansareplayingventurecapitalist:Goldman

Sachs,NYSE,Visa,Barclays,UBS,andDeloittehavemadedirectinvestments

instart-upsorsupportedincubatorsthatnurturenewventures.Pensionfundsare

enteringthefray.OMERSVentures,thebillion-dollarventurearmofoneof

Canada’slargestpublicsectorpensions,madeitsfirstinvestmentin2015.Jim

Orlando,whorunsthatgroup,islookingforthenextkillerappthat“doesfor

blockchainwhattheWebbrowserdidfortheInternet.”

Investmenthas

exploded—fromtwomilliondollarsin2012tohalfabillioninthefirsthalfof

2015.

Theexcitementispalpable.TimDrapertoldusthat,ifanything,

“financiersareunderestimatingthepotentialofblockchain.”

Vocalventure

capitalistscanadvocateforthetechnologyandsupportnascentgovernance

institutions,suchasCoinCenter,bankrolledbyAndreessenHorowitz.Digital

CurrencyGroup,aventurefirmfoundedbyBarrySilbert,hasappointed

academicsandothernontraditionaladviserstoitsboardtoacceleratethe

developmentofabetterfinancialsystemthroughbothinvestmentandadvocacy.

BanksandFinancialServices

Perhapsinnootherindustryhaveweseenaswifterchangeofopinion.Forthe

longesttime,mostfinancialinstitutionsdismissedbitcoinasthespeculativetool

ofgamblersandcriminals,andbarelyevenregisteredblockchainontheirradars.

Todaytheyarequiteliterally“allin.”Watchingthisunfoldinrealtimein2015

wastrulyincredible.Before2015,fewmajorfinancialinstitutionshad

announcedinvestmentsinthesector.TodayCommonwealthBankofAustralia,

BankofMontreal,SociétéGénérale,StateStreet,CIBC,RBC,TDBank,

MitsubishiUFJFinancialGroup,BNYMellon,WellsFargo,MizuhoBank,

Nordea,ING,UniCredit,Commerzbank,Macquarie,anddozensofothersare

investinginthetechnologyandwadingintotheleadershipdiscussion.Mostof

theworld’sbiggestbankshavesigneduptotheR3consortiumandmanymore

havepartneredwiththeLinuxFoundationtolaunchtheHyperledgerProject.

Banksshouldbeincludedinthediscussionaboutleadership,butother

stakeholdersmustremaincautiousofpowerfulincumbentslookingtocontrol

thistechnology,justastheyhadtotreadcautiouslyintheearlydaysofthe

Internet.

Developers

Developersinthecommunityaresplitonbasictechnicalissues,andthe

communityisexpressinganeedforcoordinationandleadership.Gavin

Andresen,thebitcoincoredeveloperatthecenteroftheblock-sizedebate,told

us,“I’dprefertostayintheengineroom,keepingthebitcoinenginegoing”

ratherthanspendingeverywakingmomentadvocatinghisposition.However,

giventhelackofclearleadership,Andresenhasbeeninadvertentlycastinthe

spotlight.Inthesummerof2015,hetoldus,“Myjoboverthenextsixmonthsis

tofocusonbitcoin’stechnicallife,makingsurebitcoinisstillaroundintwoor

threeyearsforthosebusinessestohappen:micropayments,stocktrading,or

propertytransfer,alltheseotherthings,”whichinvolvesalotofadvocatingand

lobbying.Tohim,theInternetgovernancenetworkisausefulstartingpoint.“I

alwayslookforrolemodels.ThefigurerolemodelistheIETF.”

Howthe

Internetisgovernedis“kindofchaoticandmessy,”hesaid,butitworksandit’s

reliable.

Academia

Academicinstitutionsarefundinglabsandcenterstostudythistechnologyand

collaboratewithcolleaguesoutsidetheirsilo.BrianFordetoldus,“Westarted

DCItocatalyzesomeofthegreatresourceswehaveatMITtofocusonthis

technology,becausewethinkit’sgoingtobeoneofthemostimportant

technologicaltransformationsoverthenexttenyears.”

JoichiIto,directorof

theMITMediaLab,sawanopportunityforacademiatostepup:“MITandthe

academiclayercanbeaplacewherewecandoassessments,doresearch,andbe

abletotalkaboutthingslikescalabilitywithoutanybiasorspecialinterests.”

JerryBrito,oneofthemostprominentlegalvoicesinthespace—firstatthe

MercatusCenteratGeorgeMasonUniversityandnowasdirectorofCoin

Center,anot-for-profitadvocacygroup—said,“Governancecomesintoplay

wherethereareseriousdecisionsthatneedtobemade,andyouneedaprocess

forthattohappen.”

HerecommendedstartingwiththeHippocraticoath:first,

donoharm.Thecurrentbottom-upapproachthatbitcoin’scoredevelopersare

using“isshowingalittlebitofitsroughedgesrightnowwiththeblock-size

debate.It’sgoingtobeverydifficulttogetanyconsensus,”Britosaid.“Wewant

tohelpdevelopthatforumandfosteraself-regulatoryorganizationifitcomesto

that.”

NotableuniversitiessuchasStanford,Princeton,NewYorkUniversity,

andDukealsoteachcoursesonblockchain,bitcoin,andcryptocurrencies.

Governments,Regulators,andLawEnforcement

Governmentsallovertheworldareuncoordinatedintheirapproach—some

favoringlaissez-fairepolicy,othersdivinginwithnewrulesandregulations

suchastheBitLicenseinNewYork.Someregimesareopenlyhostile,though

thisisincreasinglyafringeresponse.Likewise,theindustryissplittinginto

factions,thosewhosupportthenewrulesandthosewhodonot.Eventhosewho

resistgovernmentinterventionacknowledgethattheirenthusiasmtowadeinto

governancedebatesisanetpositive.AdamDraper,aprolificVCintheindustry,

acknowledged,albeitreluctantly,“Governmentendorsementcreatesinstitutional

endorsement,whichhasvalue.”

Centralbanksgloballyareeachtaking

differentstepstounderstandthistechnology.BenjaminLawsky,former

superintendentoffinancialservicesfortheStateofNewYork,saidstrong

regulationsarethefirststeptowardindustrygrowth.

NongovernmentOrganizations

Theyear2015provedtransformativefortheburgeoningconstellationofNGOs

andcivilsocietyorganizationsfocusedspecificallyonthistechnology.Though

Forde’sDCIishousedwithinMIT,weincludeithere.Othersuchgroupsinclude

Brito’sCoinCenterandPerianneBoring’sChamberofDigitalCommerce.

Thesegroupsaregainingtractioninthecommunity.

Users

Thismeansyouandme—peoplewhocareaboutidentity,security,privacy,our

otherrights,long-termviability,fairadjudication,oraforumforrightingwrongs

andfightingcriminalswhousetechnologytodestroywhatwecareabout.

Everyoneseemsdividedonbasictaxonomyandcategorization:Doesblockchain

refertothebitcoinblockchainorthetechnologyingeneral?Isitbig“B”

Blockchainorlittle“b”blockchain?Isitacurrency,commodity,ortechnology?

Isitallofthesethingsornoneofthesethings?

WomenLeadersinBlockchain

Asmanyhaveobserved,theblockchainmovementisoverpopulatedwithmen.

Intechnologyandengineering,malesstilloutnumberfemalesbyawidemargin.

However,high-profilewomenarefoundingandmanagingcompaniesinthe

space:BlytheMasters,CEOofDigitalAssetHoldings;CindyMcAdam,

presidentofXapo;MelanieShapiro,CEOofCaseWallet;JoyceKim,executive

directorofStellarDevelopmentFoundation;ElizabethRossiello,CEOand

founderofBitPesa;andPamelaMorgan,CEOofThirdKeySolutions.Manyof

themhavesuggestedtheindustryisverywelcomingtoallvoices,maleand

femalealike.Venturecapitalinblockchainisalsogainingindiversity.Arianna

Simpson,formerheadofbusinessdevelopmentatBitGo,isnowaninvestorin

thesector.JalakJobanputraisaninvestorwhoseVCfundfocuseson

decentralizedtechnology.

Whenitcomestogovernanceandstewardshipofthisglobalresource,

womenhavetakenthelead.

PrimaveraDeFilippi,facultyassociateattheBerkmanCenteratHarvard

andapermanentresearcherattheNationalCenterofScientificResearchin

Paris,isatirelessadvocateofblockchaintechnologyandhasemergedasoneof

academia’sclearestandmosteloquentvoicesongovernance.Sheisorganizer,

instigator,andpromoterofdialoguewithintheecosystem.Withlawyer-turned-

entrepreneurConstanceChoi,anothervocalproponentintheindustry,DeFilippi

hasledaseriesofblockchainworkshopsatHarvard,MIT,andStanford,aswell

asinLondon,HongKong,andSydney.Theyhavebroughttogetherdiverse

stakeholdersfromtheindustryandbeyondtodebatebigissues.Nothingisoff

limits,andtheeventsoftenmashuppeopleofdifferentbackgrounds,

persuasions,andbeliefs.

ElizabethStarkisanotheremergingstaringovernance.TheYaleLaw

Schoolprofessorhastakenupthemantleofconvener-in-chieffortheindustry.

Likeanotherprominentwoman—DawnSong,MacArthurfellowandcomputer

scienceprofessoratBerkeley,andanexpertincybersecurity—Starkcomesfrom

adistinctlyacademicbackgroundbuthasotherambitions.SheorganizedScaling

Bitcoin,conveningdevelopers,industryplayers,thoughtleaders,government

officials,andotherstakeholdersinMontreal.A“constitutionalmoment”forthe

sector,ScalingBitcoinwascreditedwithclearinglogjamsintheblock-size

debate.Todaysheisalsoleadingasanentrepreneur,collaboratingonthe

developmentoftheBitcoinLightningNetworktosolvetheblockchain’s

scalabilityissue.

PerianneBoring,aformerjournalistandTVreporter,isthefounderofthe

ChamberforDigitalCommerce,atrade-basedassociationinWashington,D.C.

Withinayear,CDChasattractedahigh-profileboard(e.g.,BlytheMasters,

JamesNewsome,GeorgeGilder).Themovementneeded“bootsontheground

inWashingtontoopenadialoguewithgovernment,”shesaid.Withher

backgroundinjournalism,Boringfocusedonmessaging,positioning,and

polish.Herorganizationis“opentoanyonewhoiscommittedtogrowingthis

community,”shesaid,andisnowaleadingvoiceinpolicy,advocacy,and

knowledgeintheburgeoningblockchaingovernanceecosystem.

Thisgrowingchorusofleaderslobbyingforgovernanceisasprescientasit

isurgent.Whenwetalkaboutgoverningblockchaintechnology,wearenot

talkingaboutregulation,atleastnotexclusively.Forone,thereareserious

limitationstousingregulationsformanaginganimportantglobalresource.As

JoichiItosaid,“Youcanregulatenetworks,youcanregulateoperations,butyou

can’tregulatesoftware.”

Soregulationswillbeoneofseveralimportant

components.BlockchainisnotliketheInternetbecausemoneyisdifferentfrom

information.BlytheMasters,consummateWall-Street-insider-turned-

blockchain-pioneer,expressedherconcern:“Newcomersaresimplyabletodo

thingsthatregulatedinstitutionsarenotabletodo,butoneneedstothinkvery

carefullyaboutwhythoseregulationsexist,andwhatpurposetheyserve,before

onecanconcludethatexposingconsumerstounregulatedfinancialactivitiesisa

goodthing.”

Ultimately,thedebateisnotaboutthekindofsocietywewantbut

abouttheopportunitiesforleaderstostewardanimportantglobalresource.

ACAUTIONARYTALEOFBLOCKCHAINREGULATION

BenjaminLawsky,theformersuperintendentoffinancialservicesfortheState

ofNewYork(NYDFS),wasoncethemostpowerfulbankregulatorinthe

UnitedStates.ToWashingtoninsiders,Lawskywasknownforhisearlymorning

selfiesonhisdailyjogsaroundthecity.ButtothetitansofWallStreet,hewasa

gutsy,ambitious(nottomentionoverzealous)scrapperwhowouldroutinelytake

thefighttoanybankhethoughtwasmisbehavingandseekhisjustdeserts.

AppointedbyfriendandlongtimepoliticalallyGovernorAndrewCuomo,

Lawskywasthefirstevertoholdtheofficeoftopwatchdogofthestate’s

charteredbanks.In2012,onlyoneyearintothejob,hemadeheadlineswhen

NYDFSreacheda$340millionsettlementwithU.K.bankStandardChartered

PLCforitshandlingofmorethan$250millionintransactionsfromIran,

prohibitedatthetimebyU.S.andE.U.sanctions.Intheprocess,NYDFS

scoopedtheJusticeDepartment,whichwasseekingasimilarpenalty.

Tothose

whothoughtbankregulationsweretoolax,hewasthenewsheriffintown,a

fearlessleaderandreformerofanindustryrunamok.Tothebanks,hewas

quicklybecomingPublicEnemyNumberOne.Lawskywasjustgettingstarted.

Itwasmid-2013Lawskywasathisdesk,probablyworkingonanother

blockbustercaseagainstthebigbanks,whenaneconomistonhisstaffknocked

onhisdoortodiscusssomeunusualinquiries.Accordingtoafewlawyersonthe

street,severalclientfirmsweretransactinginsomestrangenewvirtualcurrency

calledbitcoin.Lawsky’sfirstreactionwas“Whattheheckisbitcoin?”

The

economistwentontoexplainthatthesecompanieshadcustomerswhowere

buying,selling,trading,andpayingforgoodsandserviceswiththisdigital

dollarandthatthelawyers,evercautious,wantedtoknowwhetherthiskindof

activityqualifiedasmoneytransmission,andifso,whattodoaboutit.InNew

York,moneytransmissionsaretypicallyregulatedatthestatelevel;andsothe

NYDFS,asthestateregulatorinNewYork,hadadutytoregulateanyentity

engagedinmoneytransmission.Buthow?Lawskyhadn’tevenheardaboutthe

technology,andhehadasneakingsuspicionthiswouldbeaverydifferentkind

ofchallenge.

Almostimmediately,Lawskywasconfrontedwithaproblemthathas

becomealltoocommonplace,thatdisruptivetechnologydoesnotfitneatlyinto

existingregulatoryboxes,ahallmarkofthedigitalage.Inhismind,bitcoin

didn’tfitatall.Bitcoinisglobalinreach;federalandstategovernmentswould

belimitedinthescopeofwhattheycandotogovernandregulateit.Moreover,

thetechnologyispeertopeeranddecentralized.Regulatorsmakealiving

monitoringlargeintermediaries.Theircentralizedledgerscontaintrovesofdata,

idealforbuildingcases.Andinthedigitalage,officialsingovernmentare

rarely,ifever,inpossessionofalltheinformationneededtomakedecisionsin

thepublicinterest.Often,theylackresourcestogoverniteffectivelyandcanbe

illinformedaboutinnovation.Lawskywascomingtotermswithsomethingthat

governmentsandregulatorsofdigitaltechnologieshadwrestledwithfortwenty

years.Thankstoluck,foresight,andadifferentregulatoryframework,the

Internetwasabletogrowandthrive.Cryptocurrencieswereanotherexampleof

howdigitaltechnologyiswrestingcontrolfromtraditionaldecisionmakers,

includinggovernments.

Still,Lawskyhadajobtodo.Uponreviewingtheexistingstatutes,hefound

themwoefullyinadequate.Thedepartmentinitiallywantedtoregulatethis

technologybyenforcingruleswrittenaroundthetimeoftheCivilWar.Those

moneytransmissionlawscouldn’tpossiblyaddressanykindofdigital

technologyliketheInternet,letalonedigitalcurrenciesorcybersecurity.“The

moreIlearned,themoreinterestedIgotinhowpowerfulthistechnologyis,and

Isawallthevariousapplicationsandplatformsthatweregoingtobebuilt,over

time,”hesaid.Ifhe“couldgetregulationright,tomakesurethebadstuffwe

didn’twanttoseehappeningintheecosystemwasavoided,andatthesametime

nothaveregulationbetoooverbearing,thenwehadarealchanceofhelpinga

verypowerfultechnologymakeseriousimprovementstooursystem.”

Lawsky

concluded,“Maybeweneedanewtypeofregulatoryframeworktodealwith

somethingthatisjustqualitativelydifferent?”

Hisproposal,theBitLicense,

wasthefirstseriousattempttoprovidearegulatorylensontothisindustry.A

controversialpieceoflaw,itrevealedhowevenwell-intentionedregulationscan

produceunintendedconsequences.WhentheBitLicensewentintoeffect,there

wasamassexodusofcompaniessuchasBitfinex,GoCoin,andKrakenfrom

NewYork;theycitedtheprohibitivecostofthelicenseasamaincause.Thefew

thatstayedarewell-capitalizedandmorematurebusinesses.

Thebenefits,suchasimprovedoversightandconsumerprotection,are

significant.Licensedexchanges,suchasGemini,havegainedground,perhaps

becausetheirinstitutionalclienteleknowthey’renowasregulatedasbanks.But

withfewercompetitors,willtheBitLicensestifleinnovationandcripplegrowth?

BritoarguedthattheBitLicensemissesthemarkbyapplyingoldsolutionsto

newproblems.HecitedtheBitLicenserulethatifyoutakecustodyofconsumer

funds,youneedtogetalicense.“Withsomethinglikebitcoinandotherdigital

currencies,youhavetechnologieslikemultisig[multisignature]that,forthefirst

time,introducetheconceptofdividedcontrol.Soifthethreeofuseachhavea

keytoamultisigaddressthatneedstwooutofthree,whohascustodyofthe

funds?”

Inthiscase,theconceptofcustody,onceveryclearinthelaw,isnow

ambiguous.

“Mybeliefisthenextfivetotenyearswillbeoneofthemostdynamicand

interestingtimesinhistoryforourfinancialsystem,”Lawskysaid.

Heresigned

fromNYDFStokeepworkingonimportantissuesattheheartofthisdynamic

environment.“IwouldenjoymycareerifIgottospendmytimeworkinginthe

middleofwhatIbelieveisgoingtobeanenormouslytransformative,dynamic,

interestingtime...youhavethisworldoftechnology,whichisusuallylargely

unregulated,collidingwithprobablythemostregulatedsystemintheworld,the

financialsystem.Noonereallyknowswhatcomesofthatcollision,”hesaid.

“It’sallgoingtoworkoutoverthenextfivetotenyearsandIwanttobeinthe

middleofthatcollision.”

THESENATORWHOWOULDCHANGETHEWORLD

TheCanadianSenatesurprisedmanywhen,inJune2015,itsCommitteeon

Banking,Trade,andCommercereleasedanunambiguouslypositiveand

thoughtfulreport,“DigitalCurrency:YouCan’tFlipThisCoin.”

Incorporating

feedbackfrommultiplestakeholdersintheblockchainecosystem,thereport

detailedwhygovernmentsshouldembraceblockchaintechnology.

“ThiscouldbethenextInternet,”saidDougBlack,theCanadiansenator

fromCalgary,Alberta,andamajorcontributortothereport.“Thiscouldbethe

nextTV,thenexttelephone.WewanttosignalbothwithinandoutsideCanada,

wesupportinnovationandentrepreneurship.”

LikeBenLawsky,Blackisa

veteranlawyer.Hemadehiscareerinthecountry’soilpatch,workingonbehalf

ofoilandgasproducersasapartneratoneofthecountry’smostprestigiouslaw

firms.SenatorBlackdiffersfromMr.Lawsky,however,inhisreluctancetorush

newregulationsoutthedoor.“Governmentshouldgetoutoftheway!”Black

toldus.

AsmembersoftheCanadianSenate,SenatorBlackandhiscolleagues

havenoformallegislativerole,butcanmovetheneedleonimportantissuesby

issuingguidanceormakingrecommendationstothegovernment.Still,withan

averageageofsixty-six,theCanadianSenatewouldn’tbetheodds-onfavorite

toembracethiscutting-edgetechnology.Butthat’sexactlywhattheydid.

Reflectingontheprocess,Blackrecalledthinking,“Howdowecreatean

environmentthatencouragesinnovationasopposedtostiflesinnovation?...

That’sunusualforagovernmenttotakethatpointofviewfromtheget-go.”

AccordingtoBlack,governments“tendtobeconcernedaboutmaintaining

controlandminimizingrisk.”

Whileacknowledgingtheriskanynew

technologyposestoconsumersandbusinessalike,Blackexplained,“There’s

riskinanything;there’sriskinfiatcurrency.Wecanmanageriskatsomelevel,

butlet’salsocreateanenvironmentwhereinnovationcanbefostered.”

With

thisreport,Blackbelievesthey’vehitthemark.

Thereportmakesanumberofrecommendations,buttwostandout.First,

thegovernmentshouldstartusingtheblockchaininitsinteractionswith

Canadians.Blacksaid,“Theblockchainisamoreconfidentialvehicletoprotect

data”;therefore,“governmentshouldbelookingtostartutilizingthis

technology,whichwouldbeapowerfulmessage.”

Thisisapowerful

statement:ifyouwanttobethehubforinnovationandapioneerinthesector,

putyourmoneywhereyourmouthis,andstartinnovatingyourself.

Thesecondrecommendationisperhapsevenmoresurprising:the

governmentshouldtakealighttouchonregulation.Anumberofrespected

figuresinthelegalprofessionwhofocusonblockchaintechnologyhavemade

thisargument.AaronWrightofCardozoSchoolofLaw,YeshivaUniversity,

advocatesfor“safeharbor”lawsthatallowinnovatorstokeepinnovatingwhile

minimizinggovernmentregulationsuntilthetechnologymatures.

Josh

Fairfield,ofWashingtonandLeeUniversityLawSchool,said,“Weneed

regulationsthatactliketechnology—humble,experimental,anditerative.”

CENTRALBANKSINADECENTRALIZEDECONOMY

Financemaybethesecond-oldestprofession,butcentralbankingisarelatively

modernphenomenon.TheU.S.FederalReserve(theFed),theworld’smost

powerfulcentralbank,celebrateditscentennialin2013.

Centralbanks,intheir

relativelyshorthistory,havegonethroughmultiplereincarnations,thelastonea

bigshiftfromthegoldstandardtoafloating-ratesystemoffiatcurrencies.

Becausedigitalcurrencieschallengetheroleofcentralbanksinaneconomy,we

mightexpectcentralbankerstoopposeblockchaintechnology.However,over

theyears,thesebankershaveshownawillingnesstoinnovate.TheFed

pioneeredelectronicclearingoffundsbychampioningtheAutomatedClearing

House(ACH)systemwhenallchecksweresettledandclearedmanually.Like

centralbankselsewhere,theFedhassavoredexperimentation.Ithasembraced

unorthodoxanduntestedpolicies,mostfamously(orinfamously)the

quantitativeeasingprograminthewakeofthe2008financialcrisis,whenitused

newlymintedmoneytobuyfinancialassetssuchasgovernmentbondsatan

unprecedentedscale.

Notsurprisingly,centralbankershavebeenforwardthinkingin

understandingblockchaintechnology’simportancetotheirrespective

economies.Therearetworeasonsforthisleadership.First,thistechnology

representsapowerfulnewtoolforimprovingfinancialservices,potentially

disruptingmanyfinancialinstitutionsandenhancingtheperformanceofcentral

banksintheglobaleconomy.

Second,andthisisthebigone,blockchainraisesexistentialquestionsfor

centralbanks.Howdotheyperformtheirroleeffectivelyinaglobalmarketwith

oneormanycryptocurrenciesoutsidetheircontrol?Afterall,monetarypolicyis

akeyleverinacentralbanker’stoolboxtomanagetheeconomy,particularlyin

timesofcrisis.Whathappenswhenthatcurrencyisnotissuedbyagovernment

butexistsgloballyaspartofadistributednetwork?

Centralbankerseverywhereareexploringthesequestions.CarolynWilkins,

deputygovernoroftheBankofCanadaandacentralbankingveteran,toldus,

“Weareconfidentinourparadigmrightnow,butweunderstandmany

paradigmshaveashelflife:they’regoingtoworkwellforanumberofyears

andthenthingsaregoingtostarttogowrong.Youcanfixitatthemarginfirst,

buteventuallyyoujustneedtoswitchtosomethingelse.”Shebelievesthe

blockchaincouldbethatsomethingelse.“It’shardnottobefascinatedby

somethingsotransformative.Thistechnologyisbeingusedinwaysthathave

implicationsforcentralbankingthatspanallthefunctionsthatwehave,”she

said.

BenBernanke,formerchairoftheFed,saidin2013thatblockchain

technologycould“promoteafaster,moresecure,andmoreefficientpayment

system.”

Today,boththeFedandtheBankofEngland(andlikelyothercentral

bankerswhohavenotbeenasvocal)haveteamsdedicatedtothistechnology.

Tounderstandwhycentralbanksaresointerested,let’sfirstaddresswhat

centralbanksdo.Broadlyspeaking,theseaugustinstitutionsperformthreeroles.

First,theymanagemonetarypolicybysettinginterestratesandcontrollingthe

moneysupplyandinexceptionalcircumstancesbyinjectingcapitaldirectlyinto

thesystem.Second,theyattempttomaintainfinancialstability.Thismeansthey

actasthebankerforgovernmentandforthebanksinthefinancialsystem;they

arethelenderoflastresort.Finally,centralbanksoftensharetheresponsibility

withothergovernmententitiesofregulatingandmonitoringthefinancial

system,particularlytheactivitiesofbanksthatdealwithsavingsandloansto

averageconsumers.

Invariably,alloftheserolesareintertwinedand

codependent.

Let’sstartwithfinancialstability.“Asacentralbank,ourroleisasa

liquidityprovideroflastresort.WedothatinCanadiandollars.Therefore,

CanadiandollarsareimportantasasourceofliquidityfortheCanadianfinancial

system,”Wilkinssaid.Whatiftransactionsareinanothercurrencylikebitcoin?

“Ourabilitytoprovidelenderoflastresortserviceswouldbelimited.”

The

solution?Centralbankscouldsimplybeginholdingreservesinbitcoin,asthey

doinothercurrencies,andassetssuchasgold.Theycouldalsorequirefinancial

institutionstoholdreservesatthecentralbankinthesenonstatecurrencies.

Theseholdingswouldenableacentralbanktoperformtheirmonetaryrolein

bothfiatandcryptocurrencies.Soundsprudent,right?

Whenconsideringfinancialstabilityrelativetomonetarypolicy,Wilkins

said,“Theimplications[formonetarypolicy]ofelectronicmoneydependon

howit’sdenominated.”Shesuggestedinarecentspeechthat“e-money,”asshe

calledit,couldbedenominatedbyagovernmentinanationalcurrencyorasa

cryptocurrency.

AdigitalcurrencydenominatedinCanadiandollarswouldbe

easytomanage,shesaid.Ifanything,itwouldhelpacentralbanktorespond

morequickly.Mostlikely,wewillseeacombinationofthetwo:centralbanks

willholdandmanagealternativeblockchain-basedcurrenciesastheydoforeign

reservesandwillexploreconvertingfiatcurrencytoso-callede-moneythrough

ablockchain-basedledger.Thisnewworldwilllookalotdifferent.

Whataboutcentralbanksasregulatorsandwatchdogs?Theyhave

considerableregulatorypowerintheirrespectivecountries,buttheydonot

operateinsilos.Theycoordinateandcollaboratewithothercentralbanksand

withglobalinstitutionsliketheFinancialStabilityBoard,theBankfor

InternationalSettlements,theInternationalMonetaryFund,theWorldBank,and

others.Weneedstrongerglobalcoordinationtoaddressblockchainissues.

Today,centralbankersareaskingimportantquestions.CarolynWilkinssaid,

“It’seasytosaythatregulationshouldbeproportionatetotheproblem,butwhat

istheproblem?Andwhataretheinnovationsthatwewant?”

Thesearegreat

questionsthatwecouldaddressmoreeffectivelyinaninclusiveenvironment.

BrettonWoodsisagoodmodel.Howaboutasecondmeetingoftheminds,

notconductedinsmokyroomsbehindcloseddoors,butinanopenforumwhere

variousstakeholders,includingtheprivatesector,thetechnologycommunity,

andgovernanceinstitutionscouldparticipate?Wilkinssaid,“TheBankof

Canadaworkswithothercentralbanksonunderstandingthistechnologyand

whatitmeans.We’vehadconferencesthatinvitedavarietyofcentralbanksand

academicsandpeoplefromtheprivatesector.”

Indeed,thestoryofcentralbanksrevealsabiggerissue:governmentsoften

lacktheknow-howtorespondinafast-changingworld.Centralbankers

certainlyhaveviewsthatmatterprofoundlytothisdiscussion,buttheyshould

looktootherstakeholdersinthenetworkandothercentralbanksgloballyto

shareideas,collaborateonsubstantiveleadershipissues,andmovetheagenda

forward.

REGULATIONVERSUSGOVERNANCE

Tobesure,valueandmoneyaredifferentfromtraditionalinformation.We’re

talkingaboutsavings,apension,aperson’slivelihood,hercompany,herstock

portfolio,hereconomy,andthataffectseveryone.Don’tweneedregulation,and

fast?Canandshouldgovernmentshowrestraintinthefaceoftheseismicshifts

tocome?

Importantshiftsarerevealingthelimitsofgovernmentinanageof

acceleratinginnovation.Forexample,the2008financialcrisisshowedhowthe

speedandcomplexityoftheglobaleconomicsystemrenderstraditional

centralizedrulemakingandenforcementincreasinglyineffective.Butstronger

regulationisn’ttheantidote.Governmentscannothopetooverseeandregulate

everycornerofthefinancialmarket,technology,ortheeconomy,becausethere

aresimplytoomanyactors,innovations,andproducts.Ifanything,the

experienceillustratesthatgovernmentscanatleastforcetransparencytoshed

lightonbehaviorandcreatechange.Governmentscandemandthattheactions

ofbanks,forexample,betransparentontheWebandletcitizensandother

partiescontributetheirowndataandobservations.Citizenscanevenhelp

enforceregulations,too,perhapsbychangingtheirbuyingbehavioror,armed

withinformation,byorganizingpubliccampaignsthatnameandshame

offenders.

Ofcourse,governmentsmustbekeystakeholdersandleadersingovernance.

Theymustalsoacknowledgethattheirroleingoverningtheblockchainwillbe

fundamentallydifferentfromtheirhistoricalroleinmonetarypolicyand

financialregulation.Formillennia,stateshavehadamonopolyonmoney.What

happenswhen“money”isnotissuedexclusivelybyacentralauthoritybut

insteadis(atleastinpart)createdbyadistributedglobalpeer-to-peernetwork?

Whilegenerallypositive,theU.S.responsehasseemedattimes

contradictory.“IntheU.S.thereisarealizationfromCongresstotheexecutive

branchtodifferentagenciesincludinglawenforcementthatthistechnologyhas

serious,legitimateuses,”saidJerryBrito.

Indeed,theInternethasshownus

that,bytemperamentandinstitutionaldesign,theUnitedStatesnotonly

toleratesbutwelcomesinnovationsthatpushtheboundaries.Italsofencesoff

innovationthroughregulations—someofwhichmaybemisguidedandare

almostcertainlypremature.

Therisksofregulatingprematurely—beforefirmlygraspingtheimplications

—canhaveprofoundconsequences.DuringVictorianeraEngland,so-called

self-drivinglocomotives(i.e.,automobiles)weremandatedbylawtobe

accompaniedbyamanwalkinginfrontwavingaredflagtoalertbystandersand

horsesofthecomingarrivalofthisstrangecontraption.SteveBeauregard,CEO

ofGoCoin,aleadingcompanyintheindustry,describedthepitfallsofregulating

toosoon:“WhenWebpageswerefirstgoingup,regulatorsweretryingto

determinewhatregulatoryregimetheyshouldbelongunder.Oneideasurfaced

requiringpeoplewhobuiltandhostedWebsitestogetacitizen’sbandradio

licensebecauseyou’rebroadcasting.CanyouimaginehavingtohaveaCBradio

licensesoyoucouldputaWebsiteup?”

Thankfully,thisnevercametopass.

Let’sbeclear:regulationdiffersfromgovernance.Regulationisaboutlaws

designedtocontrolbehavior.Governanceisaboutstewardship,collaboration,

andincentivestoactoncommoninterests.Butexperiencesuggestsgovernments

shouldapproachregulatingtechnologiescautiously,actingasacollaborative

peertoothersectorsofsociety,ratherthanastheheavyhandofthelaw.They

mustparticipateasplayersinabottom-upgovernanceecosystemratherthanas

enforcersofatop-downregimeofcontrol.

BritoofCoinCenterarguedthereisaroleforgovernments,buttheyshould

exercisecaution.Headvocatesforamultistakeholdersolution,whichstartswith

education:“briefingfolksinCongress,attheagencies,inthemedia,and

answeringanyoftheirquestionsorputtingthemintouchwiththepeoplewho

canintelligentlyanswertheirquestions.”

ANEWFRAMEWORKFORBLOCKCHAINGOVERNANCE

Ratherthansimplyregulating,governmentscanimprovethebehaviorof

industriesbymakingthemmoretransparentandboostingcivicengagement—

notasasubstituteforbetterregulationbutasacomplementtotheexisting

systems.Webelieveeffectiveregulationand,byextension,effectivegovernance

comefromamultistakeholderapproachwheretransparencyandpublic

participationarevaluedmorehighlyandweighmoreheavilyindecision

making.Forthefirsttimeinhumanhistory,nonstate,multistakeholdernetworks

areformingtosolveglobalproblems.

Inrecentdecades,twomajordevelopmentshaveprovidedthebasisfora

newmodel.First,theadventoftheInternethascreatedthemeansfor

stakeholdersofallsizes,downtoindividuals,tocommunicate,contribute

resources,andcoordinateaction.Wenolongerneedgovernmentofficialsto

convenefortherestofustoalignourgoalsandefforts.Second,businesses,

academia,NGOs,andothernonstatestakeholdershavegainedtheabilitytoplay

animportantroleinglobalcooperativeefforts.Therewerenobusinesses,NGOs,

ornonstatestakeholdersatthetableatBrettonWoods.Today,thesestakeholders

routinelyengagewithgovernmentstoaddressissuesinallfacetsofsociety—

fromthegovernanceofaglobalresourceliketheInternettoaddressingglobal

problemslikeclimatechangeandhumantrafficking.

Thecombinationofthesedevelopmentsenablesthenewmodel.Fora

growinglistofglobalchallenges,self-organizingcollaborationscannowachieve

globalcooperation,governance,andproblemsolving—andmakefaster,stronger

progressthantraditionalstate-basedinstitutions.

Inconsideringthefoundationforablockchaingovernancenetwork,wepose

anumberofcriticalquestionsanddevelopaframeworkforansweringthem:

Howdowedesignsuchagovernancenetwork?

Dowecreateanewnetworkfromscratchorbuildaroundanexisting

institutionthatalreadyhasaconstituencythatdealswithinternational

financialissues?

Whatwillbethemandateforthisnetworkandwillithavethepowerto

implementandenforcepolicy?

Inwhoseinterestswillablockchaingovernancenetworkactandto

whomisitaccountable?

Andcritically,willnation-statesactuallycedeanyauthoritytoaglobal

network?

Overall,theecosystemthatgovernstheInternetisrichwithlessons.Thatit

hasbecomeaglobalresourceinsoshortatimeisastounding,innosmallpart

thankstostrongleadershipandgovernanceanddespitethepowerfulforces

againstit.

Sowhogovernsthefirst-generationInternetandhow?Avastecosystemof

companies,civilsocietyorganizations,softwaredevelopers,academics,and

governments,namelytheU.S.government,inanopen,distributed,and

collaborativemannerthatwecannotmeasurebytraditionalcommand-and-

controlhierarchiesandframeworks.Nogovernmentsorgroupofgovernments

controltheInternetoritsstandards,thoughseveralU.S.governmentagencies

oncefundedit.

IntheearlydaysoftheInternet,governmentsshowedbothrestraintand

foresight.Theyshowedrestraintbylimitingregulationandcontrolthroughout

theInternet’sevolutionandtheyshowedforesightbyallowingtheecosystemto

flourishbeforetryingtoimposerulesandregulations.Thismultistakeholder

networkworkedfortheInternet,butweneedtorecognizethattherewillbea

greaterroleforregulationofblockchaintechnologies.WhereastheInternet

democratizedinformation,theblockchaindemocratizesvalueandcutstothe

coreoftraditionalindustrieslikebanking.Clearlytherewillbearegulatoryrole

toensurethatconsumersandcitizensareprotected.Yetourresearchsuggests

thattheInternetgovernancemodelisagoodtemplate.

Questionspersistoverhowmuchnewleadershipwillcomefromtheold

Internetgovernancecommunity.VintCerf,whocoinventedtheInternetitself

andledthecreationoftheInternetSocietyandtheInternetEngineeringTask

Force,whichhascreatedvirtuallyalltheimportantInternetstandards,suggested

thatagoodstartingpointforblockchainwouldbetocreateaBOF(Birdsofa

Feather)interestgroupwithintheIETF.

Initially,manyorganizationsinvolved

inInternetgovernancevieweddigitalcurrenciesandblockchaintechnologiesas

outsidetheirpurview,butthatischanging.TheWorldWideWebConsortium,

W3C,hasmadeWebpaymentsapriority,andblockchainiscentraltothat

discussion.

Additionally,theInternetGovernanceForum(IGF)hashosted

sessionsaboutblockchainandbitcoin,whereparticipantshaveexplorednew

decentralizedgovernanceframeworksenabledbythistechnology.

Boundaries

betweenoldandnewarefluid,andmanyleadersintheInternetgovernance

network,suchasPindarWong,theInternetpioneer,formervice-chairofICANN

andtrusteeoftheInternetSociety,havebeenthemosteffectiveleadersin

blockchaingovernanceaswell.

Whatdoesthenewgovernancenetworklooklike?Therearetentypesof

GSNs.Eachinvolvessomecombinationofcompanies,governments,NGOs,

academics,developers,andindividuals.Noneofthemarecontrolledbystatesor

state-basedinstitutionsliketheUN,IMF,WorldBank,ortheG8.Allwillplay

animportantroleintheleadershipandgovernanceofblockchaintechnology.

1.KnowledgeNetworks

Theprimaryfunctionofknowledgenetworksistodevelopnewthinking,

research,ideas,andpoliciesthatcanhelpsolveglobalproblems.Moreinformed

andsavvyuserscanbetterprotectthemselvesfromfraudandtheftandprotect

theirprivacy.Theycanalsorealizethefullvalueofthisdisruptivetechnology,

creatingopportunitiesforagreatershareinglobalprosperityandgreater

financialconnectivity.

Knowledgenetworksmustfosteracultureofopenness

andinclusion,betransparent,andinvolvemultiplestakeholders.

BlockchainImplications:Knowledgenetworksaretheoriginationpoints

fordisseminatingnewideastootherGSNsandthebroaderworld.Theyarethe

keytoavoidingpitfallsandshowstoppers.Knowledgewillpreparestakeholders

toadvocatemoreeffectively,createorcocreatepolicy,andspreadcritical

informationtousers.Knowledgesharinginstigatesafruitfuldialoguewith

government.AccordingtoJerryBritoofCoinCenter,whatevertheparticular

policyissueis,ifgovernments“don’tunderstandthetechnologyanddon’t

understandtheimplications,they’resettingthemselvesupforfailure.”

Many

voicetheneedtocreatespacesforideasandinformationtobesharedand

debated.“Thereshouldbeaforumtopresentproposalsorideas,”Tyler

Winklevosssaid.

MIT’sDigitalCurrencyInitiativeisaleadingknowledge

network,tryingtouniteandexciteacademicsanduniversitiesglobally.Below

theradar,informalmeetups,liketheSanFranciscodevelopermeetupandthe

NewYorkdevelopermeetup,arealsomakingknowledgeapriority.

Blockchainworkshops.orgisanothergroupthathasconvenedstakeholdersto

spreadknowledgeandkeylessons.Reddit,theonlineforumandcommunity,is

alsoabreedinggroundfornewknowledgeinthespace.

2.DeliveryNetworks

Thisclassofnetworksactuallydeliversthechangeitseeks,supplementingor

evenbypassingtheeffortsoftraditionalinstitutions.Forexample,ICANN

performsanessentialroleintheInternetgovernancenetwork,delivering

solutionsintheformofdomainnames.

BlockchainImplications:Howdoweensurethattheincentivesare

adequatefordistributedmasscollaboration,makingthetechnologyreadyfor

primetime?Wewilllikelyhavean“ICANNmoment”forblockchain,where

organizationswillformtodeliveressentialfunctions.However,whereasICANN

andmanyotherGSNtypesintheInternetgovernancenetworkaredistinctly

American,blockchainleadersshouldpushtomaketheseorganizations

international.JoichiItosaid,“Idothinkthere’salreadyabigpushtomake

governancenon-Americanandinternationalfromthebeginningbecausethat’s

onethingwelearnedfromICANN,thatit’shardtogetoutfromunderAmerica

onceyougetstartedaspartofAmerica.”

TheCoalitionforAutomatedLegal

Applications(COALA)isaglobalorganizationthatperformsafewkeyroles:It

disseminatesknowledge,influencespolicy,andadvocatesforblockchain

technology,andsupportsthedevelopmentanddeploymentofblockchain-based

applications,allcriticaltoovercomingmajorpotentialshowstoppers.

3.PolicyNetworks

Sometimesnetworkscreategovernmentpolicy,eventhoughtheymayconsistof

nongovernmentalplayers.Policynetworkssupportpolicydevelopmentorcreate

analternativeforpolicy,whethergovernmentssupportthemornot.Thegoalof

policynetworksisnottowrestcontrolofthepolicy-makingprocessfrom

governments.Instead,theirgoalistoturndecisionmakingfromthetraditional

hierarchicalbroadcastmodeltooneofconsultationandcollaboration.

BlockchainImplications:Today,anascentpolicynetworkisemerging.

CoinCenter,anot-for-profitpolicygroupinWashington,D.C.,focusesonfive

coreverticals:innovation,consumerprotection,privacy,licensing,and

AML/KYC(anti–moneylaundering/knowyourcustomer).TheChamberof

DigitalCommerce,atradeorganization,focusesonpromotingtheacceptance

anduseofdigitalcurrencies.

TheUnitedKingdomhasitsownDigital

CurrencyAssociation,asdoAustraliaandCanada,thatspeaksforindustry.With

thehiringofJohnCollins,aformersenioradvisertotheU.S.government,

Coinbasebecamethefirstcompanytoinstallapermanentpolicyadvocate.

Promotingandunitingmanystrongvoicesinthepolicyarenawillensurethat

blockchainhasabetterchanceoffulfillingitspotential.Forexample,weknow

miningconsumesalotofenergyandthatclimatechangeisabigproblem.

Responsiblepolicywillgoalongwaytowardbuildingasustainablefuture,and

governmentcan’tdoitalone.

4.AdvocacyNetworks

Advocacynetworksseektochangetheagendaorpoliciesofgovernments,

corporations,andotherinstitutions.TheInternethasloweredthecostof

collaboration,andtodaytheworldiswitnessingthedramaticriseofincreasingly

powerfuladvocacynetworksthataremoreglobal,widelydistributed,and

technologicallysophisticatedthananythingwe’veseen.

BlockchainImplications:Advocacynetworksarisewiththe

disillusionmentwithtraditionalpoliticalandcivicinstitutions,makingthema

logicalfitfortheblockchaincommunity,whichistryingtoupendhowthose

traditionalinstitutionssolveproblems.However,intheseearlydays,advocacy

networksmustworkwithgovernmentasapartner.Advocacynetworksare

closelytiedtopolicynetworks,soit’sunsurprisingthatCoinCenterandthe

ChamberofDigitalCommercearetakingtheleadinthisarea.Wecouldalso

includehereCOALA,MIT’sDigitalCurrencyInitiative,andothers.Advocacy

iscriticaltoscalingblockchaintechnology.Intheabsenceofstrongadvocates

whostandupforstakeholdersandstakeholderrights,governmentsandother

powerfulinstitutionscouldtrytostifle,twist,orusurpthispowerfulopen

networktotheirexclusiveadvantage,anotherdangerouspotentialshowstopper.

5.WatchdogNetworks

Thesenetworksscrutinizeinstitutionstoensurethattheybehaveappropriately.

Topicsrangefromhumanrights,corruption,andtheenvironmenttofinancial

services.Intheprocess,theydrivepublicdebate,boosttransparency,andignite

movementsforchange.Theroleofwatchdogsisinherentlyintertwinedwiththat

ofadvocacynetworksandpolicynetworks.Policynetworkscollaboratewith

governmenttoshapepolicythatworks.Watchdogsensurethatindustrycomplies

withpoliciesandeffectivelymonitorsandenforcescompliance.Governments

thatabusethepublictrustcanalsobescrutinizedandheldaccountable.

BlockchainImplications:TheBlockchainAllianceisapartnershipbetween

lawenforcement,NGOs,tradeorganizations,andtheprivatesectorandisthe

firsttrueadvocacynetworktoforminthespace.CoinCenterandtheChamber

ofDigitalCommerce,withsupportfromBitFury,Bitfinex,BitGo,Bitnet,

Bitstamp,Blockchain,Circle,Coinbase,andothers,havepartneredwithlaw

enforcementagenciessuchastheU.S.JusticeDepartment,theFBI,theSecret

Service,andtheDepartmentofHomelandSecurity.Aswehighlightedinthe

previouschapter,blockchainbeingco-optedbycriminalsonawidespreadscale

isashowstopper.Thesewatchdogshaveanimportantadvocacyroleaswell.In

theaftermathoftheParisterroristattacks,someEuropeanlawmakers,

regulators,andlawenforcementblamedbitcoinasthesourceofterrorism

financing.TheBlockchainAlliancecalledforpatience:Let’snotregulateoutof

fear,

theysaid.Asofthiswriting,wedon’tknowhoweffectivetheywere,but

surelyintheirabsencethingswouldhaveturnedoutworse,withgovernment

approachingthejobunilaterally.Otherthantheself-policingroleofcommunity

memberswhoconvene,collaborate,anddebateonforumsandonReddit,few

otherwatchdognetworkshavesteppedup.Partnershipswithlawenforcement

areahelpfulstart,buttheblockchainecosystemneedsfullyindependent

organizations,perhapsliketraditionalwatchdogssuchasAmnestyInternational

andHumanRightsWatch,tomonitorgovernments,corporations,andotherlarge

institutions.Otherwise,weriskfallingvictimtoanothershowstopper:that

blockchainbecomesanewandpowerfulsurveillancetoolusedbycorruptand

unscrupulousgovernments.

6.Platforms

Thedigitalageallowedorganizationstobemuchmorethanclosed,siloed

institutions;theycanalsobeplatformsforvaluecreation,innovation,andglobal

problemsolving.OrganizationslikeChange.orgempowerindividualstoinitiate

campaignsinsupportofsocialcausesfromhumanrightstoclimatechange.A

“petitionplatform”harnessesthecollectiveforceofmillionsofpeopleand

catalyzestheirpassionintolastingimpact.Opendataplatformscanapplyto

manyissues—fromclimatechangetotheblockchain.

BlockchainImplications:Asblockchaintechnologygainsinsystemic

importance,stakeholdersmustaggregateandscrutinizedata.Thebitcoin

blockchainmayberadicallyopen,transparent,andreconcilable,butclosed

blockchainsusedineverythingfromfinancialservicestotheInternetofThings

mightnotbe.Imagineaplatformthatallowedregularcitizenstoaggregateand

scrutinizedata,provingastrongbulwarkagainstcreepingshowstoppersof

scalability,governmentencroachment,orunsustainableenergyuse.Theywould

enablewatchdogsandadvocatesamongustoholdinstitutionsandcorporations

moreaccountableanddriveconstructivediscussion.

7.StandardsNetworks

Standardsnetworksarenon-state-basedorganizationsthatdeveloptechnical

specificationsandstandardsforvirtuallyanything,includingstandardsforthe

Internetitself.Theydeterminethestandardsthatformthefundamentalbuilding

blocksforproductdevelopmentandallowapromisinginnovationtomakethe

leaptomassadoption.Forglobalstandardsnetworkstowork,theymustengage

theexpertiseofindividuals,institutions,civilsocietyorganizations,and,mostof

all,privatesectorenterprise.TheInternetEngineeringTaskForce,oneofthe

primarystandardsbodiesfortheInternetgovernancenetwork,excelsat

incorporatingthemanyviewsofdiversestakeholders.

BlockchainImplications:Originally,theBitcoinFoundationfunded

developmentofthebitcoincoreprotocol,thecommonstandardsusedbythe

community.However,thenear-collapseofthefoundation(precipitatedby

mismanagementandwaste)provedtheneedfornetworkedgovernance

solutions.Recognizingtheprofoundimportanceofthistechnologyandtheneed

forcarefulstewardshipandnurturing,MITcreatedtheDigitalCurrency

Initiative,whichhassincebankrolledthebitcoincoredeveloperssotheycan

continuetheirwork.“Westeppedinimmediatelyandprovidedthemwith

positionsattheMITmedialab,sotheycouldcontinuetoindependentlyworkon

supportingthecoredevelopmentofbitcoin,”saidBrianForde.

Forthecore

developers,theirabilitytoworkautonomouslywascentraltothedesign.

GavinAndresenisamongthecoredevelopersworkingatMIT.Hebelieves

leadershipisrequiredtomovetheagendaforwardoncommonstandards,such

asthemuch-debatedblock-sizequestion.“Maybeyoucandesignlightsocketset

wavesbycommittee,butyoucan’tdesignsoftwarestandardsthatway,”he

suggested.PointingtotheearlydaysoftheWeb,Andresensaid,“TheInternet

modelshowsthatyoucanhavetechnologieswhereconsensusdoesarise,even

thoughthere’snooneclearleader,”butthat“youcaneitherhaveapersonora

processthatendsinaperson.Youdefinitelyneedoneortheother.”

Consensus

mechanismsalonecan’tsupportstandardsdevelopments.

Scalingbitcoin.orgisanorganizationthatconvenesengineersandacademics

toaddressmajortechnicalissues,includingstandardsquestions.PindarWong,

whochairstheplanningcommitteeforScalingbitcoin.org(amonghismany

otherimportantleadershiproles),hasbeenakeyleaderinconveningkey

stakeholdersandclearingtechnicallogjamsinthesector.Infinancialservices,

bothR3andtheHyperledgerProjectaretacklingcriticalstandardsissues.

Invariably,therewillhavetobestandardsnetworksonavarietyofthings,from

theblockchainprotocolthatformsthebasisofthefinancialservicesindustryof

thefuture,tocommonstandardsforprivacyandpaymentsintheInternetof

Things.

Whileeachofthesegroupsattackstheproblemfromdifferentanglesand

withdifferentagendas,eachsharesacommongoaltomakethistechnology

readyforprimetime—bybuildinginfrastructure,developingstandards,and

makingitscalable.

8.NetworkedInstitutions

Somenetworksprovidesuchawiderangeofcapabilitiesthatwedescribethem

as“networkedinstitutions.”Theyarenotstate-basedbuttruemultistakeholder

networks.Thevaluetheygeneratecanrangefromknowledge,advocacy,and

policytoactualdeliveryofsolutions.

BlockchainImplications:TheWorldEconomicForum(WEF),aleading

networkedinstitution,hasbeenavocalproponentofblockchaintechnology.The

blockchainwasfrontandcenteratDavosinJanuary2016.JesseMcWaters,

financialinnovationleadattheWEF,believesblockchaintechnologyisa

general-purposetechnology,liketheInternet,whichwecanusetomakemarkets

radicallymoreefficientandimproveaccesstofinancialservices.TheWEF

predictedthatwithinadecade,wecouldstore10percentofglobalGDPon

blockchains.

Asanorganization,theWEFhaschampionedandadvancedbig

issues,suchasincomeinequality,climatechange,andevenremittances.Other

networkedinstitutions,fromthesmallestgroupstothebiggestfoundationsinthe

world,suchastheClintonFoundationandtheBillandMelindaGates

Foundation,wouldbewisetochampionthistechnologytoadvancesuchbig

issuesasfinancialinclusionandhealthcaredelivery.Networkedinstitutions

oftenhavearoletoplayininfluencinggovernmentpolicymaking,makingthem

acriticallinkandstrategicpartnerinovercominganumberofmajor

showstoppers.

9.Diasporas

Diasporasareglobalcommunitiesformedbypeopledispersedfromtheir

ancestrallandsandunitedbycultureandidentitywiththeirhomeland.Thanksto

theInternet,thesepeopleandaffiliatedorganizationscancollaboratein

multistakeholdernetworks.Oneofthefunctionsofmanyoftoday’sdiasporasis

toaddressandhelpsolvecommonglobalproblems.

BlockchainImplications:Diasporasarecriticaltoblockchain’sfuture.For

one,blockchainmakestheprocessofsendingremittancessimpleandaffordable.

Farfrombeingajobkiller,blockchainactuallycreatestimeandresourcesfor

thesepeopletopursueotherwage-earningopportunitiesorentrepreneurial

endeavors.Whileafewcompanieshaveoriginatedinplacessuchasthe

PhilippinesandKenya,diasporasmustdomoretoaccelerateknowledge,

adoption,andacceptanceofblockchainpaymentmethods.Today,themajorityof

companiestargetingtheopportunity,suchasAbraandPaycase,areU.S.,U.K.,

Canada,orChinabased.

10.GovernanceNetworks

Theblockchaingovernancenetworkwillcombineallthefeaturesandattributes

ofthenineotherGSNtypes.Ultimately,ablockchaingovernancenetwork

shouldstrivetobeinclusiveandwelcomeparticipationfromallrelevant

stakeholdergroups.Thenetworkshouldbeameritocracy,meaningthatthe

communitywouldchampionviableproposalsregardlessoftherankandstatusof

theproposer.Thenetworkshouldbetransparent,releasingallofitsdata,

documentation,andmeetingminutesforpublicscrutiny.Finally,decisions

shouldbereached,asmuchaspossible,byconsensusinordertogainlegitimacy

fortheoutcomes.

ANEWAGENDAFORTHENEXTDIGITALAGE

Ablockchaingovernancenetworkiscriticaltostewardshipofthisglobal

resource.ButhowcanweensurethatthisnextgenerationoftheInternetfulfills

itspromise?

Thenexteraofthedigitalageisdeliveringunlimitedpossibilities,

significantdangers,unknownroadblocks,formidablechallenges,andafuture

thatisfarfromcertain.Technology,especiallythedistributedkind,creates

opportunitiesforeveryone,butinexorablyhumansdeterminetheoutcome.Inthe

wordsofConstanceChoi,“Thistechnologyholdsbothpromiseandperil.It’s

howwewieldit.”

Asthischapterhasdiscussed,thereisaroleforeveryoneto

playinachievingthenewpromiseofthedigitalage.

Inpreviousepochaltransitions,societiestookactiontoimplementnew

understandings,laws,andinstitutions.Thesetransformationsofcivilizationtook

time,usuallycenturies,andwereoftenpunctuatedbystrifeorevenrevolutions.

Todaythesituationisdifferent.Changeishappeninginfinitelyfaster.More

important,Moore’slawindicatesthattherateofchangeisaccelerating

exponentially.We’removingtotheproverbial“secondhalfofthechessboard”

whereexponentialgrowthuponexponentialgrowthcreatesthe

incomprehensible.

Theupshotisthatourregulatoryandpolicyinfrastructures

arewoefullyinadequateandadaptingtooslowlyornotatalltotherequirements

ofthedigitalage.Thedisruptionsoftodayaremovingsofasttheyaregetting

beyondthecapacityofindividualsandinstitutionstocomprehendthem,let

alonemanagetheirimpact.Ourdemocraticinstitutionsandinstrumentswere

designedfortheindustrialage—infacttheyoriginatedpreciselyinthe

transformationfromagrarianfeudalsocietiesintoindustrialcapitaliststates.

Howcanweacceleratethehumantransformationrequiredtokeeppacewith

acceleratingtechnologicalinnovationanddisruption?Howcanweavoid

massivesocialdislocation,orworse?Lestwebeaccusedofbeingtechnology

deterministsorutopians,mayweproposethatit’stimeforanewsocialcontract

forthedigitalage.Governments,theprivatesector,thecivilsociety,and

individualsneedtocollaboratetoforgenewcommonunderstandings.

AsweenterthissecondgenerationoftheInternet,it’stimeforaManifesto

fortheDigitalAge.CallitaDeclarationofInterdependence.Digitalagecitizens

haveRights—accesstodigitalinfrastructures,literacy,medialiteracy,lifelong

learning,andrenewedfreedomofspeechonlinewithoutthefearofsurveillance.

Thedigitaleconomyandsocietyshouldbegovernedaccordingto

Principles.Surely,thosewhoworkshouldshareinthewealththeycreate.If

computerscandothework,thentheworkweek,notourstandardofliving,

shouldbereduced.Infact,Satoshi’simplicitdesignprinciplesfortheblockchain

revolutionshouldserveuswell—weneedinstitutionsthatactwithintegrity,

security,privacy,inclusion,rightsprotection,anddistributedpower.Let’swork

todistributeopportunityandprosperityatthepointoforigin,ratherthansimply

redistributingwealthafterit’sbeencreatedbytraditionalclassstructures.

Blockchaintechnologymayreducethecostsandsizeofgovernment,but

we’llstillneednewLawsinmanyareas.Therearetechnologicalandbusiness

modelsolutionstothechallengesofintellectualpropertyandrightsownership.

Soweshouldberewritingortrashingoldlawsthatstifleinnovationthrough

overprotectionofpatents.Betterantitrustactionmuststemthetrendtoward

monopoliessothatnooneoverpaysfor,say,basicInternetorfinancialservices.

EightypercentofAmericanshavenochoicewhenitcomestoInternetservice

providers,whichmighthelpexplainwhybandwidthisoneoftheslowestand

mostexpensiveinthedevelopedworld.Criminalfixerswhomanipulate

everythingfromforeignexchangetodieselemissionsshouldbeprosecutedand

punishedappropriately.

We’llneedInstitutionalTransformationacrosstheboard.Centralbankswill

needtochangetheirroleincurrencymanagementandmonetarypolicyand

collaboratemultilaterallywithmorestakeholdersintheeconomyandsociety.

Weneedschoolsanduniversitieswithstudent-focused,customizedcollaborative

masteryofinformationontheblockchain,freeingupstudentsandteachersalike

toparticipateinsmallgroupdiscussionandprojects.Weneedauniversalpatient

recordontheblockchain,toensurecollaborativehealthwhenwecanmanage

ourownwellnessoutsideofthesystem.Whenweenterthehealthcaresystem,

weshouldnotsufferbecauseofignorance-inspireddruginteractionsormedicine

notbasedonevidence.Politicianswillneedtoadapttoatransparentworld

wheresmartcontractsensuretheiraccountabilitytoelectorates.Howdowe

managethedisruptionafterdigitalcurrenciesupendthe$500billionremittances

market?

BlockchaintechnologycanenablenewPhysicalInfrastructuresrequiring

newpartnershipsandunderstandingsamongstakeholders.Whathappenstothe

millionsofUberdriverswhenSUberwipesouttheirjobs?Whatcancitiesdoto

ensurethatin2025citizensthinkpositivelyaboutintelligenttransportation

systems?Howdoweeffectivelymovetoadistributedblockchain-enabled

electricalpowergridwherehomeownersarecontributorsratherthanjust

customersofelectricity?Howwillwefindtheleadershiptoimplementa

blockchain-enabledpersonalcarbontradingsystem?

THETRUSTPROTOCOLANDYOU

Willthelawofparadigmskickintoeffect—thatleadersoftheoldhavethe

greatestdifficultyembracingthenew?ConsidertheleaderswhoendorsedDon’s

1994bookTheDigitalEconomy:theCEOsofNortelNetworks,MCI,Nynex,

Ameritech,andGEInformationServices,allofwhicharegone.Atleasthe

didn’tincludetheCEOsfromKodak,Borders,Blockbuster,orCircuitCity.

(AnothercautionarynoteforthekindjacketendorsersofBlockchain

Revolution.)

Whydidn’tRupertMurdochcreateTheHuffingtonPost?Whydidn’tAT&T

launchSkype,orVisacreatePayPal?CNNcouldhavebuiltTwitter,asitisall

aboutthesoundbite,no?GMorHertzcouldhavelaunchedUber,andMarriott,

Airbnb.GannettcouldhavecreatedCraigslistorKijiji.eBaywouldhavebeena

naturalplayfortheYellowPages.MicrosofthadtheresourcestocreateGoogle

oranynumberofbusinessmodelsbasedontheInternetratherthanthepersonal

computer.Whydidn’tNBCinventYouTube?Sonycouldhavepreempted

Apple’siTunes.WherewasKodakwhenitwastimeforInstagramorPinterestto

beinvented?WhatifPeopleorNewsweekhadcomeupwithBuzzFeedor

Mashable?

Aswewroteatthebeginningofthistome,“Itappearsthatonceagainthe

technologicalgeniehasbeenunleashedfromitsbottle...nowatourservicefor

anotherkickatthecan—totransformtheeconomicpowergridandtheoldorder

ofhumanaffairs.Ifwewillit.”LikethefirstgenerationoftheInternet,the

BlockchainRevolutionpromisestoupendbusinessmodelsandtransform

industries.Butthatisjustthestart.Blockchaintechnologyispushingus

inexorablyintoanewera,predicatedonopenness,merit,decentralization,and

globalparticipation.

Weexpectaperiodofvolatility,speculation,andmisuse.Wealsoexpecta

strongandsteadybarrelingforward,aplowingasideofthesacredcowsonthe

tracks.Nooneknowsyetwhatimpactthistrainwillhaveonfinancialservices.

IsBenLawskyright—thattheindustrycouldbeunrecognizableinfivetoten

years?TimDrapersaid,“BitcoinistothedollarastheInternetistopaper.”

Coulditbethatblockchain’smostardentsupportersareactuallyunderestimating

thelong-termpotentialhere?Willtheblockchainbethebiggestboontoindustry

efficiencyandvaluesincetheinventionofdouble-entryaccountingorthejoint-

stockcorporation?HernandodeSotosaidblockchainholdsthepotentialtobring

fivebillionpeopleintotheglobaleconomy,changetherelationshipbetweenthe

stateandcitizens(forthebetter),andbecomeapowerfulnewplatformfor

globalprosperityandaguarantorofindividualrights.Tohim,“thewholeideaof

peacethroughlaw,thewholeideaofonefamilyhumankindisthatwereach

agreementoncommonstandards.WeshouldconsiderhowtheUniversal

DeclarationofHumanRightscouldbebetterservedwithblockchain.”

How

canweachievethisbetterfuture?

Mostofthepeopleleadingtherevolutionarestillunknowns,exceptfor

veteranslikeNetscape’sprogenitorMarcAndreessen.You’velikelyneverheard

ofmostofthepeoplequotedinthisbook.Thenagain,who’dheardofIranian

immigrantPierreOmidyarorWallStreetprogrammerJeffBezosin1994?Much

dependsonhowtheleadersoftheindustrygetonboard.Isablockchain

alternativetoFacebookorTwitterreallyachievableorwilltheincumbents

respondbyaddressinguserconcernsaboutdataownershipandprivacy?Doesn’t

matter.Consumerswineitherway.WillVisawitherorwillitchangeitsbusiness

modeltoembracethepowerofblockchain?HowwillApplerespondtoanartist-

centeredmusicindustry?Whatwilltin-potdictatorsthinkaboutadecentralized

Internetthattheycan’tturnofforcontrol?Cantheblockchainmaketechnology

accessibletotheworld’stwobillionunbankedpeople?

Thefailurerateofstart-upsishigh,andsoweexpectagoodnumberofour

casestudiestofallbythewayside,notbecauseblockchaintechnologyisabad

idea,butbecause—foreachoneofourexamples—therearemanycompeting

start-ups.Allofthemcan’tsurvive.WebelievethosethatfollowSatoshi’s

principleshaveabettershotthanthosethatdon’t.

Theseareexcitingandperiloustimes.Asabusinessleader,useBlockchain

Revolutionasyourplaybook,sure,butrealizealsothattherulesofthegame

themselvesarechanging.Thinkaboutyourbusiness,yourindustry,andyour

job:HowwillIbeaffectedandwhatcanbedone?Donotfallintothetrap

broughtaboutbymanyparadigmshiftsthroughouthistory.Today’sleaders

cannotaffordtobetomorrow’slosers.Toomuchisatstakeandweneedyour

help.Pleasejoinus.

NOTES
Chapter1:TheTrustProtocol
1.https://www.technologyreview.com/s/419452/moores-outlaws/.
2.https://cryptome.org/jya/digicrash.htm.
3.“HowDigiCashBlewEverything,”translatedfromDutchintoEnglishbyIanGriggandcolleaguesand
e-mailedtoRobertHettingamailinglist,February10,1999.Cryptome.org.JohnYoungArchitects.Web.
July19,2015.https://cryptome.org/jya/digicash.htm.“HowDigiCashAllesVerknalde”
www.nextmagazine.nl/ecash.htm.Next!Magazine,January1999.Web.July19,2015.
https://web.archive.org/web/19990427/http://nextmagazine.nl/ecash.htm.
4.http://nakamotoinstitute.org/the-god-protocols/.
5.BrianFung,“MarcAndreessen:In20Years,We’llTalkAboutBitcoinLikeWeTalkAbouttheInternet
Today,”TheWashingtonPost,May21,2014;www.washingtonpost.com/blogs/the-
switch/wp/2014/05/21/marc-andreessen-in-20-years-well-talk-about-bitcoin-like-we-talk-about-the-
internet-today/,accessedJanuary21,2015.
6.InterviewwithBenLawsky,July2,2015.
7.www.economist.com/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-
economy-works-trust-machine.
8.www.coindesk.com/bitcoin-venture-capital/.
9.Fung,“MarcAndreessen.”
10.www.coindesk.com/bank-of-england-economist-digital-currency/.
11.LeighBuchananreportsontheKauffmanFoundationresearchin“AmericanEntrepreneurshipIs
ActuallyVanishing,”www.businessinsider.com/927-people-own-half-of-the-bitcoins-2013-12.
12.ThisdefinitionwasdevelopedinDonTapscottandDavidTicoll,TheNakedCorporation(NewYork:
FreePress,2003).
13.www.edelman.com/news/trust-institutions-drops-level-great-recession/.
14.www.gallup.com/poll/1597/confidence-institutions.aspx.
15.InterviewwithCarlosMoreira,September3,2015.
16.DonTapscottisamemberoftheWISeKeyAdvisoryBoard.
17.DonTapscotthasbeenoneofmanyauthorstowriteaboutthedarksidepotentialofthedigitalage,for
exampleinTheDigitalEconomy:PromiseandPerilintheAgeofNetworkedIntelligence(NewYork:
McGrawHill,1995).
18.InterviewwithCarlosMoreira,September3,2015.
19.TomPeters,“TheWowProject,”FastCompany,MansuetoVenturesLLC,April30,1999;
http://www.fastcompany.com/36831/wow-project.
20.InterviewwithCarlosMoreira,September3,2015.
21.“TheVirtualYou”isatermpopularizedbyAnnCavoukianandDonTapscottinWhoKnows:
SafeguardingYourPrivacyinaNetworkedWorld(NewYork:McGraw-Hill,1997).

22.ScottMcNealy,thenCEOofSunMicrosystems,wasthefirstin1999.
23.InterviewwithAndreasAntonopoulos,July20,2015.
24.InterviewwithJoeLubin,July30,2015.
25.Eventuallysophisticatedpersonaldataqueryserviceswillnotevenbeabletoreadthatdatabecauseit
willbegiventothemencrypted.Stilltheywillbeabletoanswerquestionsregardingthatdatabyasking
thosequestionsoftheencrypteddataitselfusinghomomorphicencryptiontechniques.
26.LeadingthinkershaveabroadviewofprosperitythatgoesbeyondGDPgrowth.Harvard’sMichael
Porterhascreatedasocialprogressimperativehttp://www.socialprogressimperative.org.Economist
JosephStiglitzandothershaveresearchedmeasuresbeyondGDP—http://www.insee.fr/fr/publications-
et-services/dossiers_web/stiglitz/doc-commission/RAPPORT_anglais.pdf.Thereareothereffortsthattry
toimproveGDPbutstayclosertohome—http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-
get-ready-for-a-new-way-to-measure-the-economy/.
27.InterviewwithVitalikButerin,September30,2015.
28.LuigiMarcoBassani,“Life,Libertyand...:JeffersononPropertyRights,”JournalofLibertarian
Studies18(1)(Winter2004):58.
29.InterviewwithHernandodeSoto,November27,2015.
30.Ibid.
31.www.theguardian.com/music/2013/feb/24/napster-music-free-file-sharing,accessedAugust12,2015.
32.www.inc.com/magazine/201505/leigh-buchanan/the-vanishing-startups-in-decline.html.
33.NakedCitywasapolicedramaseriesthatairedfrom1958to1963ontheABCtelevisionnetwork.
34.AnOctober2015WorldEconomicForumreportsuggestsitwillnotbecomemainstreamuntil2027.
35.InterviewwithDavidTicoll,December12,2015.
Chapter2:BootstrappingtheFuture:SevenDesignPrinciplesofthe
BlockchainEconomy
1.InterviewwithAnnCavoukian,September2,2015.
2.GuyZyskind,OzNathan,andAlex“Sandy”Pentland,“Enigma:DecentralizedComputationPlatform
withGuaranteedPrivacy,”whitepaper,MassachusettsInstituteofTechnology,2015.June10,2015.
Web.October3,2015,arxiv.org/pdf/1506.03471.pdf.
3.InterviewwithAnnCavoukian,September2,2015.
4.Ibid.
5.InterviewwithAustinHill,July22,2015.
6.InterviewwithAnnCavoukian,September2,2015.
7.VitalikButerin,“ProofofStake:HowILearnedtoLoveWeakSubjectivity,”Ethereumblog,Ethereum
Foundation,November25,2014.Web.October3,2015,blog.ethereum.org/2014/11/25/proof-stake-
learned-love-weak-subjectivity.
8.DinoMarkAngaritis,e-mailattachment,November27,2015.Hearrivedathiscalculationby“assuming
hashrateof583,000,000Gh/s.(Gh/s=billionhashes/s).Thereare600secondsin10minutes.
600*583,000,000=349,800,000,000billionhashesin10minutes.That’s350Quintillion/
350,000,000,000,000,000,000/350millionmillionbillion.”
9.Proofofburncallsforminerstosendtheircoinstoadead-endaddresswheretheybecome
unredeemable.Inexchangeforburningthesecoins,minersgainentrancetoalotterywhere,presumably,
theywinbackmorethantheyburned.It’snotaconsensusmechanismbutatrustmechanism.
10.InterviewwithPaulBrody,July7,2015.
11.FranklinDelanoRoosevelt,“ExecutiveOrder6102—RequiringGoldCoin,GoldBullionandGold
CertificatestoBeDeliveredtotheGovernment,”TheAmericanPresidencyProject,ed.GerhardPeters
andJohnT.Woolley,April5,1933,www.presidency.ucsb.edu/ws/?pid=14611,accessedDecember2,
2015.

12.InterviewwithJoshFairfield,June1,2015.
13.AllusiontoBandai’sdigitaltoydesignedsothatuserswouldtakecareofitandprotectit.Itdiedifno
onetendedtoit.
14.JosephE.Stiglitz,“LessonsfromtheGlobalFinancialCrisisof2008,”SeoulJournalofEconomics
23(3)(2010).
15.Ernst&YoungLLP,“TheBigDataBacklash,”December2013,
www.ey.com/UK/en/Services/Specialty-Services/Big-Data-Backlash;http://tinyurl.com/ptfm4ax.
16.Thetypeofattackwasnamedafter“Sybil,”apseudonymofawomandiagnosedwithdissociative
identitydisorderdescribedina1973bookofthatname.Cat-lovingcomputerscientistJohn“JD”
Douceurpopularizedthenameina2002paper.
17.SatoshiNakamoto,“Bitcoin:APeer-to-PeerElectronicCashSystem,”www.bitcoin.org,November1,
2008;www.bitcoin.org/bitcoin.pdf,section6,“Incentive.”
18.NickSzabo.“Bitgold.”Unenumerated.NickSzabo.December27,2008.Web.October3,2015.
http://unenumerated.blogspot.com/2005/12/bit-gold.html.
19.InterviewwithAustinHill,July22,2015.
20.NealStephenson,SnowCrash(1992).AnallusiontoSnowCrash’svirtualworld,ofwhichHiro
Protagonististheprotagonistandhero.HirowasoneofthetophackersoftheMetaverse.Kongbucksare
likebitcoin:thefranchulates(corporatestates,fromthecombinationoffranchiseandconsulate)issue
theirownmoney.
21.ErnestCline,ReadyPlayerOne(NewYork:Crown,2011).
22.InterviewwithAustinHill,July22,2015.
23.JohnLennon.“Imagine.”Imagine.ProducersJohnLennon,YokoOno,andPhilSpector.October11,
1971.www.lyrics007.com/John%20Lennon%20Lyrics/Imagine%20Lyrics.html.
24.AndyGreenberg.“Banking’sDataSecurityCrisis.”Forbes.November2008.Web.October3,2015.
www.forbes.com/2008/11/21/data-breaches-cybertheft-identity08-tech-cx_ag_1121breaches.html.
25.PonemonInstituteLLC,“2015CostofDataBreachStudy:GlobalAnalysis,”sponsoredbyIBM,May
2015,www-03.ibm.com/security/data-breach.
26.PonemonInstituteLLC,“2014FifthAnnualStudyonMedicalIdentityTheft,”sponsoredbyMedical
IdentityFraudAlliance,February23,2015,Medidfraud.org/2014-fifth-annual-study-on-medical-identity-
theft.
27.InterviewwithAndreasAntonopoulos,July20,2015.
28.MichaelMelone,“BasicsandHistoryofPKI,”MikeMelone’sblog,MicrosoftCorporation,March10,
2012.Web.October3,2015.http://tinyurl.com/ngxuupl.
29.“WhyAren’tMorePeopleUsingEncryptedEmail?,”Virtrublog,VirtruCorporation,January24,2015.
Web.August8,2015.www.virtru.com/blog/aren’t-people-using-email-encryption,August8,2015.
30.InterviewwithAndreasAntonopoulos,July20,2015.
31.InterviewwithAustinHill,July22,2015.
32.Ibid.
33.InterviewwithAnnCavoukian,September2,2015.
34.Ibid.
35.DavidMcCandless,“WorldsBiggestDataBreaches,”InformationIsBeautiful,DavidMcCandless,
October2,2015.Web.October3,2015.www.informationisbeautiful.net/visualizations/worlds-biggest-
data-breaches-hacks/.
36.InterviewwithHalukKulin,June9,2015.
37.InterviewwithAustinHill,July22,2015.
38.Coinbaseprivacypolicy,www.coinbase.com/legal/privacy,November17,2014,accessedJuly15,
2015.
39.SeeDonTapscottandDavidTicoll,TheNakedCorporation:HowtheAgeofTransparencyWill
RevolutionizeBusiness(NewYork:Simon&Schuster,2003).
40.InterviewwithHalukKulin,June9,2015.

ProofofExistence.com,September2,2015;www.proofofexistence.com/about/.
InterviewwithSteveOmohundro,May28,2015.
InterviewwithAndreasAntonopoulos,July20,2015.
Ibid.
InterviewwithStephenPair,June11,2015.
EdellaSchlargerandElinorOstrom,“Property-RightsRegimesandNaturalResources:AConceptual
Analysis,”LandEconomics68(3)(August1992):249–62;www.jstor.org/stable/3146375.
InterviewwithHalukKulin,June9,2015.
JohnPaulTitlow,“FireYourBoss:Holacracy’sFounderontheFlatterFutureofWork,”FastCompany,
MansuetoVenturesLLC,July9,2015;www.fastcompany.com/3048338/the-future-of-work/fire-your-
boss-holacracys-founder-on-the-flatter-future-of-work.
WorldBank,September2,2015;www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-
in-number-of-unbanked-says-new-report.
“BitcoinPowersNewWorldwideCellphoneTop-UpService,”CoinDesk,February15,2015;
www.coindesk.com/bitcoin-powers-new-worldwide-cellphone-top-service/,accessedAugust26,2015.
FAQs,BitMoby.com,mHITsLtd.,n.d.;www.bitmoby.com/faq.html,accessedNovember14,2015.
InterviewwithGavinAndresen,June8,2015.
InterviewwithAustinHill,July22,2015.
JakobNielsen,“Nielsen’sLawofInternetBandwidth,”NielsenNormanGroup,April5,1998;
www.nngroup.com/articles/law-of-bandwidth/,accessedAugust26,2015.
MatthewWeaver,“WorldLeadersPayTributeatAuschwitzAnniversaryCeremony,”TheGuardian,
GuardianNewsandMediaLimited,January27,2015.Web.September5,2015,
http://www.theguardian.com/world/2015/jan/27/-sp-watch-the-auschwitz-70th-anniversary-ceremony-
unfold.
Chapter3:ReinventingFinancialServices
Estimatesrangefrom$87.5millionto$112million(IMF).
https://ripple.com/blog/the-true-cost-of-moving-money/.
InterviewwithVikramPandit,August24,2015.
www.nytimes.com/2015/07/12/business/mutfund/putting-the-public-back-in-public-finance.html.
www.worldbank.org/en/topic/poverty/overview.
http://hbswk.hbs.edu/item/6729.html.
InterviewwithHernandodeSoto,November27,2015.
http://corporate.westernunion.com/About_Us.html.
InterviewwithErikVoorhees,June16,2015.
PaulA.David,“TheDynamoandtheComputer:AnHistoricalPerspectiveontheModernProductivity
Paradox,”EconomicHistoryofTechnology80(2)(May1990):355–61.
JosephStiglitz,“LessonsfromtheGlobalFinancialCrisis,”revisedversionofalecturepresentedat
SeoulNationalUniversity,October27,2009.
www.finextra.com/finextra-downloads/newsdocs/The%20Fintech%202%200%20Paper.pdf.
www.bloomberg.com/news/articles/2015-07-22/the-blockchain-revolution-gets-endorsement-in-wall-
street-survey.
www.swift.com/assets/swift_com/documents/about_swift/SIF_201501.pdf.
https://lightning.network/.
InterviewwithChrisLarsen,July27,2015.
InterviewwithAustinHill,July22,2015.
InterviewwithBlytheMasters,July27,2015.
Ibid.

Ibid.
Ibid.
https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
InterviewwithAustinHill,July22,2015.
July2015byGreenwichAssociates;www.bloomberg.com/news/articles/2015-07-22/the-blockchain-
revolution-gets-endorsement-in-wall-street-survey.
BlytheMasters,fromExponentialFinancekeynotepresentation:www.youtube.com/watch?
v=PZ6WR2R1MnM.
https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
InterviewwithJesseMcWaters,August13,2015.
InterviewwithAustinHill,July22,2015.
https://blog.ethereum.org/2015/08/07/on-public-and-private-blockchains/.
InterviewwithChrisLarsen,July27,2015.
InterviewwithAdamLudwin,August26,2015.
InterviewwithBlytheMasters,July27,2015.
InterviewwithEricPiscini,July13,2015.
InterviewwithDerekWhite,July13,2015.
Ibid.
Later,BankofAmerica,BNYMellon,Citi,Commerzbank,DeutscheBank,HSBC,MitsubishiUFJ
FinancialGroup,MorganStanley,NationalAustraliaBank,RoyalBankofCanada,SEB,Société
Générale,andTorontoDominionBank;www.ft.com/intl/cms/s/0/f358ed6c-5ae0-11e5-9846-
de406ccb37f2.html#axzz3mf3orbRX;www.coindesk.com/citi-hsbc-partner-with-r3cev-as-blockchain-
project-adds-13-banks/.
http://bitcoinnewsy.com/bitcoin-news-mike-hearn-bitcoin-core-developer-joins-r3cev-with-5-global-
banks-including-wells-fargo/.
http://www.linuxfoundation.org/news-media/announcements/2015/12/linux-foundation-unites-industry-
leaders-advance-blockchain.
www.ifrasia.com/blockchain-will-make-dodd-frank-obsolete-bankers-say/21216014.article.
http://appft.uspto.gov/netacgi/nph-Parser?
Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-
bool.html&r=1&f=G&l=50&co1=AND&d=PG01&s1=20150332395&OS=20150332395&RS=20150332395?
p=cite_Brian_Cohen_or_Bitcoin_Magazine.
www.youtube.com/watch?v=A6kJfvuNqtg.
InterviewwithJeremyAllaire,June30,2015.
Ibid.
Ibid.
Ibid.
Heraldedasanothersigntheindustrywas“growingup”;www.wsj.com/articles/goldman-a-lead-
investor-in-funding-round-for-bitcoin-startup-circle-1430363042.
InterviewwithJeremyAllaire,June30,2015.
InterviewwithStephenPair,June11,2015.
AlexTapscotthasconsultedtoVogogoInc.
InterviewwithSureshRamamurthi,September28,2015.
E-mailcorrespondencewithBlytheMasters,December14,2015.
InterviewwithTomMornini,July20,2015.
TheseideaswereoriginallyexploredinTheNakedCorporationbyDonTapscottandDavidTicoll.
Ibid.
www.accountingweb.com/aa/auditing/human-errors-the-top-corporate-tax-and-accounting-mistakes.
Ibid.
InterviewwithSimonTaylor,July13,2015.

Ibid.
InterviewwithJeremyAllaire,June30,2015.
InterviewwithChristianLundkvist,July6,2015.
InterviewwithAustinHill,July22,2015.
InterviewwithEricPiscini,July13,2015.
www2.deloitte.com/us/en/pages/about-deloitte/articles/facts-and-figures.html.
InterviewwithEricPiscini,July13,2015.
Ibid.
InterviewwithTomMornini,July20,2015.
Ibid.
www.calpers.ca.gov/docs/forms-publications/global-principles-corporate-governance.pdf.
InterviewwithIzabellaKaminska,August5,2015.
http://listedmag.com/2013/06/robert-monks-its-broke-lets-fix-it/.
TheRighttoBeForgottenMovementisgainingsteam,particularlyinEurope:
http://ec.europa.eu/justice/data-protection/files/factsheets/factsheet_data_protection_en.pdf.
www.bloomberg.com/news/articles/2014-10-07/andreessen-on-finance-we-can-reinvent-the-entire-
thing.
http://www.nytimes.com/2015/12/24/business/dealbook/banks-reject-new-york-city-ids-leaving-
unbanked-on-sidelines.html.
InterviewwithPatrickDeegan,June6,2015.
Ibid.
https://btcjam.com/.
InterviewwithErikVoorhees,June16,2015.
www.sec.gov/about/laws/sa33.pdf.
http://www.wired.com/2015/12/sec-approves-plan-to-issue-company-stock-via-the-bitcoin-blockchain/.
http://investors.overstock.com/mobile.view?c=131091&v=203&d=1&id=2073583.
https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
JamesSurowiecki,TheWisdomofCrowds:WhytheManyAreSmarterThantheFewandHow
CollectiveWisdomShapesBusiness,Economies,SocietiesandNations(NewYork:Doubleday,2014).
www.augur.net.
Frome-mailexchangewiththeAugurteam:JackPeterson,CoreDeveloper;JoeyKrug,Core
Developer;PeronetDespeignes,SpecialOps.
InterviewwithAndreasAntonopoulos,December8,2014.
InterviewwithBarrySilbert,September22,2015.
InterviewwithBenjaminLawsky,July2,2015.
Chapter4:Re-architectingtheFirm:TheCoreandtheEdges
InterviewwithJoeLubin,July13,2015.
CompanieslikeAppleandSpotifywillbeabletousethenewplatformaswell.Thegoalisthatitwillbe
ownedbymanyentitiesinthemusicindustry,especiallyartists.Itwilllikelybeeasiertoearntokensif
youcreatecontentthanifyoujustresellsomeoneelse’scontent.
https://slack.com/is.
https://github.com.
Coasewrote:“Afirmhasaroletoplayintheeconomicsystemif...[t]ransactionscanbeorganized
withinthefirmatlesscostthanifthesametransactionswerecarriedoutthroughthemarket.Thelimitto
thesizeofthefirm[isreached]whenthecostsoforganizingadditionaltransactionswithinthefirm
[exceed]thecostsofcarryingthesametransactionsinthemarket.”AscitedinOliverWilliamsonand

SydneyG.Winter,eds.,TheNatureoftheFirm(NewYorkandOxford:OxfordUniversityPress,1993),
90.
6.OliverWilliamson,“TheTheoryoftheFirmasGovernanceStructure:FromChoicetoContract,”The
JournalofEconomicPerspectives16(3)(Summer2002)171–95.
7.Ibid.
8.PeterThielwithBlakeMasters,ZerotoOne:NotesonStartups,orHowtoBuildtheFuture(NewYork:
CrownBusiness,2014).
9.LordWilberforce,TheLawofRestrictiveTradePracticesandMonopolies(Sweet&Maxwell,1966),
22.
10.InterviewwithYochaiBenkler,August26,2015.
11.JohnHagelandJohnSeelyBrown,“EmbracetheEdgeorPerish,”Bloomberg,November28,2007;
www.bloomberg.com/bw/stories/2007-11-28/embrace-the-edge-or-perishbusinessweek-business-news-
stock-market-and-financial-advice.
12.InterviewwithVitalikButerin,September30,2015.
13.InterviewwithAndreasAntonopoulos,July20,2015.
14.TheoneexceptionistheWayBackMachine,whichallowsyoutogetadeeperhistory.
15.OliverE.Williamson,“TheTheoryoftheFirmasGovernanceStructure:FromChoicetoContract,”
JournalofEconomicPerspectives16(3),Summer2002.
16.Ibid.
17.MichaelC.JensenandWilliamH.Meckling,“TheoryoftheFirm:ManagerialBehavior,AgencyCosts
andOwnershipStructure,”JournalofFinancialEconomics305(1976):310–11(arguingthatthe
corporation—or,moregenerally,afirm—isacollectionofconsensualrelationshipsamongshareholders,
creditors,managers,andperhapsothers);seealsogenerally,FrankH.EasterbrookandDanielR.Fischel,
TheEconomicStructureofCorporateLaw(Cambridge,Mass.:HarvardUniversityPress,1991).
18.VitalikButerin,“BootstrappingaDecentralizedAutonomousCorporation:PartI,”BitcoinMagazine,
September19,2013;https://bitcoinmagazine.com/7050/bootstrapping-a-decentralized-autonomous-
corporation-part-i/.
19.NickSzabo,“FormalizingandSecuringRelationshipsonPublicNetworks,”
http://szabo.best.vwh.net/formalize.html.
20.http://szabo.best.vwh.net/smart.contracts.html.
21.InterviewwithAaronWright,August10,2015.
22.Cryptographersstartedusing“Alice”and“Bob”insteadof“PartyA”and“PartyB”asaconvenient
waytodescribeexchangesbetweenthem,lendingsomeclarityandfamiliaritytodiscussionsabout
computationalencryption.ThepracticeissaidtodatefromRonRivest’s1978work,“Security’s
InseparableCouple,”CommunicationsoftheACM.NetworkWorld,February7,2005;
www.networkworld.com/news/2005/020705widernetaliceandbob.html.
23.GitHub.com,January3,2012;https://github.com/bitcoin/bips/blob/master/bip-0016.mediawiki,
accessedSeptember30,2015.
24.www.coindesk.com/hedgy-hopes-tackle-bitcoin-volatility-using-multi-signature-technolog/.
25.https://books.google.ca/books?id=VXIDgGjLHVgC&pg=PA19&lpg=PA19&
dq=a+workman+moves+from+department+Y+to+department+X&source=bl&ots=RHb0qrpLz_&sig=LaZFqatLYllrBW8ikPn4PEZ9_7U&hl=en&sa=X&ved=0ahUKEwjgyuO2gKfKAhUDpB4KHb0JDcAQ6AEIITAB#v=onepage&q=a
%20workman%20moves%20from%20department%20Y%20to%20department%20X&f=false.
26.ElliotJaques,“InPraiseofHierarchy,”HarvardBusinessReview,January–February1990.
27.InterviewwithYochaiBenkler,August26,2015.
28.TapscottandTicoll,TheNakedCorporation.
29.WernerErhardandMichaelC.Jensen,“PuttingIntegrityintoFinance:APurelyPositiveApproach,”
November27,2015,HarvardBusinessSchoolNOMUnitWorkingPaperNo.12-074;BarbadosGroup
WorkingPaperNo.12-01;EuropeanCorporateGovernanceInstitute(ECGI)—FinanceWorkingPaper
No.417/2014.
30.BankofAmerica’sAverageReturnonEquitysinceDecember31,2009,islessthan2percent;

https://ycharts.com/companies/BAC/return_on_equity.
31.InterviewwithSteveOmohundro,May28,2015.
32.E-mailinterviewwithDavidTicoll,December9,2015.
33.InterviewwithMelanieSwan,September14,2015.
34.https://hbr.org/1990/05/the-core-competence-of-the-corporation.
35.MichaelPorter,“WhatIsStrategy?,”HarvardBusinessReview,November–December1996.
36.InterviewwithSusanAthey,November20,2015.
Chapter5:NewBusinessModels:MakingItRainontheBlockchain
1.Topreventspam,it’spossiblethatnewpublickeys(personas)withlowreputationwillhavetopaya
certainfeetolist.Thefeecanbemovedtoanescrowcontractandbereturnedoncethepersonahas
successfullyrentedtheirpropertyout,orperhapsaftersomeperiodoftimeelapsesandtheydecideto
deletetheirlisting.LargedataitemslikepictureswillbekeptonIPFSorSwarm,butthehashofthedata
andtheinformationidentifyingthepersonathatownsthedatawillbekeptontheblockchaininsidethe
bAirbnbcontract.
2.PerhapsusingtheWhisperprotocol.
3.FormattedandannotatedwiththeHypertextMarkupLanguage(HTML).
4.DavidMcCandless,“World’sBiggestDataBreaches,”InformationIsBeautiful,October2,2015;
www.informationisbeautiful.net/visualizations/worlds-biggest-data-breaches-hacks/,accessedNovember
27,2015.
5.AsdefinedbyVitalikButerin:“Cryptoeconomicsisatechnicaltermroughlymeaning‘it’sdecentralized,
itusespublickeycryptographyforauthentication,andituseseconomicincentivestoensurethatitkeeps
goinganddoesn’tgobackintimeorincuranyotherglitch.’”From“TheValueofBlockchain
Technology,PartI,”https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-
technology/.
6.www.youtube.com/watch?v=K2fhwMKk2Eg.
7.http://variety.com/2015/digital/news/netflix-bandwidth-usage-internet-traffic-1201507187/.
8.InterviewwithBramCohen,August17,2015.
9.StanFranklinandArtGraesser,“IsItanAgent,orJustaProgram?ATaxonomyforAutonomous
Agents,”www.inf.ufrgs.br/~alvares/CMP124SMA/IsItAnAgentOrJustAProgram.pdf.
10.Ibid.,5.
11.VitalikButerin,https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-
terminology-guide/.“Autonomousagentsareontheothersideoftheautomationspectrum;inan
autonomousagent,thereisnonecessaryspecifichumaninvolvementatall;thatistosay,whilesome
degreeofhumaneffortmightbenecessarytobuildthehardwarethattheagentrunson,thereisnoneed
foranyhumanstoexistthatareawareoftheagent’sexistence.”
12.Ibid.
13.Technicaldetail:Becausestoringdatadirectlyonblockchainsisveryexpensive,it’smorelikelythat
thereisahashofthedata,andthedataitselfwillbeonsomeotherdecentralizeddatastoragenetwork
likeSwarmorIPFS.
14.InterviewwithVitalikButerin,September30,2015.
15.InterviewwithAndreasAntonopoulos,July20,2015.
16.Ibid.
17.DonTapscottandAnthonyD.Williams,Wikinomics:HowMassCollaborationChangesEverything
(NewYork:Portfolio/Penguin,2007).Wikinomicsdefinedsevensuchbusinessmodels.Thelisthasbeen
extendedhere.
18.Commons-basedPeerProductionisatermdevelopedbyHarvardLawprofessorYochaiBenklerinthe
seminalarticle“Coase’sPenguin,”TheYaleLawJournal,2002;

www.yale.edu/yalelj/112/BenklerWEB.pdf.
http://fortune.com/2009/07/20/information-wants-to-be-free-and-expensive/.
InterviewwithYochaiBenkler,August26,2015.
InterviewwithDinoMarkAngaritis,August7,2015.
AndrewLih,“CanWikipediaSurvive?,”TheNewYorkTimes,June20,2015;
www.nytimes.com/2015/06/21/opinion/can-wikipedia-survive.html.
http://techcrunch.com/2014/05/09/monegraph/.
http://techcrunch.com/2015/06/24/ascribe-raises-2-million-to-ensure-you-get-credit-for-your-art/.
www.nytimes.com/2010/04/15/technology/15twitter.html?_r=0.
http://techcrunch.com/2014/05/09/monegraph/.
www.verisart.com/.
http://techcrunch.com/2015/07/07/verisart-plans-to-use-the-blockchain-to-verify-the-authencity-of-
artworks/.
InterviewwithYochaiBenkler,August26,2015.
InterviewwithDavidTicoll,August7,2015.
InterviewwithYochaiBenkler,August26,2015.
www.nytimes.com/2013/07/21/opinion/sunday/friedman-welcome-to-the-sharing-economy.html?
pagewanted=1&_r=2&partner=rss&emc=rss&.
SarahKessler,“TheSharingEconomyIsDeadandWeKilledIt,”FastCompany,September14,2015;
www.fastcompany.com/3050775/the-sharing-economy-is-dead-and-we-killed-it#1.
“Prosumers”isaterminventedbyAlvinTofflerinFutureShock(1980).InTheDigitalEconomy
(1994)DonTapscottdevelopedtheconceptandnotionof“prosumption.”
InterviewwithRobinChase,September2,2015.
https://news.ycombinator.com/item?id=9437095.
ThisscenariowasoriginallyexplainedbyDonTapscottin“TheTransparentBurger,”Wired,March
2004;http://archive.wired.com/wired/archive/12.03/start.html?pg=2%3ftw=wn_tophead_7.
InterviewwithYochaiBenkler,August26,2015.
Called“thewikiworkplace”inWikinomics.
CAPTCHAstandsfor“CompletelyAutomatedPublicTuringTesttoTellComputersandHumans
Apart.”
InterviewwithJoeLubin,July13,2015.
Ibid.
Chapter6:TheLedgerofThings:AnimatingthePhysicalWorld
Nottheirrealnames.Thisstoryisbasedondiscussionswithindividualsfamiliarwiththesituation.
PrimaveraDeFilippi,“It’sTimetoTakeMeshNetworksSeriously(andNotJustfortheReasonsYou
Think),”Wired,January2,2014.
InterviewwithEricJennings,July10,2015.
Ibid.
InterviewwithLawrenceOrsini,July30,2015.
DonpredictedthedevelopmentofsuchnetworksinDonTapscottandAnthonyWilliams,
Macrowikinomics:NewSolutionsforaConnectedPlanet(NewYork:Portfolio/Penguin,2010,updated
2012).
InterviewwithLawrenceOrsini,July30,2015.
PujaMondal,“WhatIsDesertification?Desertification:Causes,EffectsandControlofDesertification,”
UNEP:Desertifcation,UnitedNationsEnvironmentProgramme,n.d.;
https://desertification.wordpress.com/category/ecology-environment/unep/,accessedSeptember29,


9.www.internetlivestats.com/internet-users/,asofDecember1,2015.
10.CadieThompson,“ElectronicPillsMayBetheFutureofMedicine,”CNBC,April21,2013;
www.cnbc.com/id/100653909;andNattGarun,“FDAApprovesEdibleElectronicPillsThatSenseWhen
YouTakeYourMedication,”DigitalTrends,August1,2012;www.digitaltrends.com/home/fda-approves-
edible-electronic-pills/.
11.MarkJaffe,“IOTWon’tWorkWithoutArtificialIntelligence,”Wired,November2014;
www.wired.com/insights/2014/11/iot-wont-work-without-artificial-intelligence/.
12.IBM,“DeviceDemocracy,”2015,4.
13.AllisonArieff,“TheInternetofWayTooManyThings,”TheNewYorkTimes,September5,2015.
14.IBM,“DeviceDemocracy,”10.
15.InterviewwithDinoMarkAngaritis,August11,2015.
16.InterviewwithCarlosMoreira,September3,2015.
17.Ibid.
18.InterviewwithMichelleTinsley,June25,2015.
19.Ibid.
20.McKinseyGlobalInstitute,“TheInternetofThings:MappingtheValueBeyondtheHype,”June2015.
21.InterviewwithEricJennings,July10,2015.
22.IBMInstituteforBusinessValue,“TheEconomyofThings:ExtractingNewValuefromtheInternetof
Things,”2015.
23.CadieThompson,“AppleHasaSmartHomeProblem:PeopleDon’tKnowTheyWantItYet,”
BusinessInsider,June4,2015;www.businessinsider.com/apple-homekit-adoption-2015-6.
24.McKinseyGlobalInstitute,“TheInternetofThings.”
25.InterviewwithEricJennings,July10,2015.
26.IBM,“DeviceDemocracy,”9.
27.Ibid.,13.
28.McKinseyGlobalInstitute,“TheInternetofThings.”MGIdefinedninesettingswithvaluepotential.
29.www.wikihow.com/Use-Uber.
30.http://consumerist.com/tag/uber/page/2/.
31.MikeHearn,“FutureofMoney,”TuringFestival,Edinburgh,Scotland,August23,2013,posted
September28,2013;www.youtube.com/watch?v=Pu4PAMFPo5Y&feature=youtu.be.
32.McKinsey,“AnExecutive’sGuidetotheInternetofThings,”August2015;
www.mckinsey.com/Insights/Business_Technology/An_executives_guide_to_the_Internet_of_Things?
cid=digital-eml-alt-mip-mck-oth-1508.
Chapter7:SolvingtheProsperityParadox:EconomicInclusionand
Entrepreneurship
1.http://datatopics.worldbank.org/financialinclusion/country/nicaragua.
2.www.budde.com.au/Research/Nicaragua-Telecoms-Mobile-and-Broadband-Market-Insights-and-
Statistics.html.
3.“PropertyDisputesinNicaragua,”U.S.Embassy,
http://nicaragua.usembassy.gov/property_disputes_in_nicaragua.html.Thereareanestimatedthirty
thousandpropertiesindispute.
4.InterviewwithJoyceKim,June12,2015.
5.Ibid.
6.Ibid.
7.www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-in-number-of-unbanked-says-new-
report;andC.K.Prahalad,TheFortuneattheBottomofthePyramid:EradicatingPovertyThrough
Profits(Philadelphia:WhartonSchoolPublishing,2009).Thisfigureisanestimate.

InterviewwithJoyceKim,June12,2015.
www.ilo.org/global/topics/youth-employment/lang—en/index.htm.
ThomasPiketty,CapitalintheTwenty-FirstCentury(Cambridge,Mass.:BelknapPress,2014).

www.brookings.edu/~/media/research/files/papers/2014/05/declining%20business%20dynamism%20litan/declining_business_dynamism_hathaway_litan.pdf.
RuthSimonandCaelainnBarr,“EndangeredSpecies:YoungU.S.Entrepreneurs,”TheWallStreet
Journal,January2,2015;www.wsj.com/articles/endangered-species-young-u-s-entrepreneurs-
1420246116.
WorldBankGroup,DoingBusiness,www.doingbusiness.org/data/exploretopics/starting-a-business.
InterviewwithHernandodeSoto,November27,2015.
www.tamimi.com/en/magazine/law-update/section-6/june-4/dishonoured-cheques-in-the-uae-a-
criminal-law-perspective.html.
www.worldbank.org/en/topic/poverty/overview.Tobeprecise,itwas1.91billionin1990.
http://digitalcommons.georgefox.edu/cgi/viewcontent.cgi?article=1003&context=gfsb.
http://reports.weforum.org/outlook-global-agenda-2015/top-10-trends-of-2015/1-deepening-income-
inequality/.
Ibid.
InterviewwithTylerWinklevoss,June9,2015.
Congo,Chad,CentralAfricanRepublic,SouthSudan,Niger,Madagascar,Guinea,Cameroon,Burkina
Faso,Tanzania;http://data.worldbank.org/indicator/FB.CBK.BRCH.P5?
order=wbapi_data_value_2013+wbapi_data_value+wbapi_data_value-last&sort=asc.
www.aba.com/Products/bankcompliance/Documents/SeptOct11CoverStory.pdf.
http://www.nytimes.com/2015/12/24/business/dealbook/banks-reject-new-york-city-ids-leaving-
unbanked-on-sidelines.html.
E-mailcorrespondencewithJoeLubin,August6,2015.
DavidBirch,IdentityIstheNewMoney(London:LondonPublishingPartnership,2014),1.
E-mailcorrespondencewithJoeLubin,August6,2015.
InterviewwithJoyceKim,June12,2015.
InterviewwithHernandodeSoto,November27,2015.
InterviewwithHalukKulin,June9,2015.
E-mailcorrespondencewithJoeLubin,August6,2015.
InterviewwithBalajiSrinivasan,May29,2014.
www.doingbusiness.org/data/exploretopics/starting-a-business.
InterviewwithHalukKulin,June9,2015.
AnalieDomingoagreedtoletusshadowherasshewentthroughhernormalroutineofsendingmoney
hometohermotherinthePhilippines.AnaliehasbeenanemployeeofDonTapscottandAnaLopesfor
twentyyearsandisalsoaclosefriend.
www12.statcan.gc.ca/nhs-enm/2011/dp-pd/prof/details/page.cfm?
Lang=E&Geo1=PR&Code1=01&Data=Count&SearchText=canada&SearchType=Begins&SearchPR=01&A1=All&B1=All&Custom=&TABID=1.
https://remittanceprices.worldbank.org/sites/default/files/rpw_report_june_2015.pdf.
Theremittancemarketis$500billion;averagefeesof7.7percenttranslateto$38.5billioninfees.
DilipRatha,“TheImpactofRemittancesonEconomicGrowthandPovertyReduction,”Migration
PolicyInstitute8(September2013).
AdolfBarajas,etal.,“DoWorkers’RemittancesPromoteEconomicGrowth?,”IMFWorkingPaper,
www10.iadb.org/intal/intalcdi/pe/2009/03935.pdf.
“AidandRemittancesfromCanadatoSelectCountries,”CanadianInternationalDevelopment
Platform,http://cidpnsi.ca/blog/portfolio/aid-and-remittances-from-canada/.
WorldBankRemittancePriceIndex,https://remittanceprices.worldbank.org/en.
2011NationalHouseholdSurveyHighlights,CanadianCensusBureau,
www.fin.gov.on.ca/en/economy/demographics/census/nhshi11-1.html.

43.https://support.skype.com/en/faq/FA1417/how-much-bandwidth-does-skype-need.
44.InterviewwithEricPiscini,July13,2015.
45.http://corporate.westernunion.com/Corporate_Fact_Sheet.html.
46.Atthetimeofwriting,AbrahadnotopeneditsdoorsinCanada.However,wewereabletotestAbra’s
technologywithAnalieandhermothersuccessfullywithAbra’shelp.
47.InterviewwithBillBarhydt,August25,2015.
48.Ibid.
49.Ibid.
50.“ForeignAidandRent-Seeking,TheJournalofInternationalEconomics,2000,438;
http://conferences.wcfia.harvard.edu/sites/projects.iq.harvard.edu/files/gov2126/files/1632.pdf.
51.Ibid.
52.www.propublica.org/article/how-the-red-cross-raised-half-a-billion-dollars-for-haiti-and-built-6-homes.
53.“Mortality,CrimeandAccesstoBasicNeedsBeforeandAftertheHaitiEarthquake,”Medicine,
ConflictandSurvival26(4)(2010).
54.http://unicoins.org/.
55.JeffreyAshewithKylaJaggerNeilan,InTheirOwnHands:HowSavingsGroupsAreRevolutionizing
Development(SanFrancisco:Berrett-KoehlerPublishers,2014).
56.E.KumarSharma,“FounderFalls,”BusinessToday(India),December25,2011;
www.businesstoday.in/magazine/features/vikram-akula-quits-sks-microfiance-loses-or-
gains/story/20680.html.
57.NingWang,“MeasuringTransactionCosts:AnIncompleteSurvey,”RonaldCoaseInstituteWorking
Papers2(February2003);www.coase.org/workingpapers/wp-2.pdf.
58.www.telesurtv.net/english/news/Honduran-Movements-Slam-Repression-of-Campesinos-in-Land-
Fight-20150625-0011.html.
59.USAID,theMillenniumChallengeCorporation,andtheUNFoodandAgricultureOrganization.
60.PaulB.Siegel,MalcolmD.Childress,andBradfordL.Barham,“ReflectionsonTwentyYearsofLand-
RelatedDevelopmentProjectsinCentralAmerica:TenThingsYouMightNotExpect,andFuture
Directions,”KnowledgeforChangeSeries,InternationalLandCoalition(ILC),Rome,2013;
http://tinyurl.com/oekhzos,accessedAugust26,2015.
61.Ibid.
62.AmbassadorMichaelB.G.Froman,USOfficeoftheTradeRepresentative,“2015NationalTrade
EstimateReportonForeignTradeBarriers,”USTR.gov,April1,2015;
https://ustr.gov/sites/default/files/files/reports/2015/NTE/2015%20NTE%20Honduras.pdf.
63.InterviewwithHernandodeSoto,November27,2015.
64.http://in.reuters.com/article/2015/05/15/usa-honduras-technology-idINKBN0O01V720150515.
65.InterviewwithKausikRajgopal,August10,2015.
66.WorldBank,“DoingBusiness2015:GoingBeyondEfficiencies,”Washington,D.C.:WorldBank,
2014;DOI:10.1596/978-1-4648-0351-2,LicenseCreativeCommonsAttributionCCBY3.0IGO.
67.“ITUReleases2014ICTFigures,”
www.itu.int/net/pressoffice/press_releases/2014/23.aspx#.VEfalovF_Kg.
68.www.cdc.gov/healthliteracy/learn/understandingliteracy.html.
69.www.proliteracy.org/the-crisis/adult-literacy-facts.
70.CIAWorldFactbook,literacystatistics,www.cia.gov/library/publications/the-world-
factbook/fields/2103.html#136.
Chapter8:RebuildingGovernmentandDemocracy
1.http://europa.eu/about-eu/countries/member-countries/estonia/index_en.htm;
http://www.citypopulation.de/Canada-MetroEst.html.

2.In-personconversationbetweenEstonianpresidentToomasHendrikIlvesandDonTapscottattheWorld
EconomicForum’sGlobalAgendaCouncilmeetinginAbuDhabi,UnitedArabEmirates,October2015.
3.
www.socialprogressimperative.org/data/spi#data_table/countries/com6/dim1,dim2,dim3,com9,idr35,com6,idr16,idr34.
4.https://e-estonia.com/the-story/the-story-about-estonia/.Estoniaisveryproudofitse-Estoniainitiatives
andhaspublishedalotofinformationontheWeb.Alloftheinformationandstatisticsusedinthis
sectioncamefromtheGovernmentofEstoniaWebsite.
5.“ElectronicHealthRecord,”e-Estonia.com,n.d.;https://e-estonia.com/component/electronic-health-
record/,accessedNovember29,2015.
6.“e-Cabinet,”e-Estonia.com,n.d.;https://e-estonia.com/component/e-cabinet/,accessedNovember29,
2015.
7.“ElectronicLandRegister,”e-Estonia.com,n.d.;https://e-estonia.com/component/electronic-land-
register/,accessedNovember29,2015.
8.CharlesBrett,“MyLifeUnderEstonia’sDigitalGovernment,”TheRegister,
www.theregister.co.uk/2015/06/02/estonia/.
9.InterviewwithMikeGault,August28,2015.
10.“KeylessSignatureInfrastructure,”e-Estonia.com,n.d.;https://e-estonia.com/component/keyless-
signature-infrastructure/,accessedNovember29,2015.
11.OlgaKharif,“BitcoinNotJustforLibertariansandAnarchistsAnymore,”BloombergBusiness,
October9,2014;www.bloomberg.com/bw/articles/2014-10-09/bitcoin-not-just-for-libertarians-and-
anarchists-anymore.Tobesure,thereisastronglibertariantrendintheAmericanpopulationasawhole.
AccordingtothePewResearchCenter,11percentofAmericansdescribethemselvesaslibertarianand
knowthedefinitionoftheterm.“InSearchofLibertarians,”www.pewresearch.org/fact-
tank/2014/08/25/in-search-of-libertarians/.
12.“BitcoinProvestheLibertarianIdeaofParadiseWouldBeHellonEarth,”BusinessInsider,
www.businessinsider.com/bitcoin-libertarian-paradise-would-be-hell-on-earth-2013-12#ixzz3kQqSap00.
13.HumanRightsWatch,“WorldReport2015:Eventsof2014,”
www.hrw.org/sites/default/files/wr2015_web.pdf.
14.InterviewwithHernandodeSoto,November27,2015.
15.SeymourMartinLipset,PoliticalMan:TheSocialBasesofPolitics,2nded.(London:Heinemann,
1983),64.
16.InterviewwithHernandodeSoto,November27,2015.
17.HernandodeSoto,“TheCapitalistCureforTerrorism,”TheWallStreetJournal,October10,2014;
www.wsj.com/articles/the-capitalist-cure-for-terrorism-1412973796,accessedNovember27,2015.
18.InterviewwithHernandodeSoto,November27,2015.
19.InterviewwithCarlosMoreira,September3,2015.
20.MelanieSwan,Blockchain:BlueprintforaNewEconomy(Sebastopol,Calif.:O’ReillyMedia,January
2015),45.
21.EmilySpaven,“UKGovernmentExploringUseofBlockchainRecordkeeping,”CoinDesk,September
1,2015;www.coindesk.com/uk-government-exploring-use-of-blockchain-recordkeeping/.
22.J.P.Buntinx,“‘BlockchainTechnology’IsBringingBitcointotheMainstream,”Bitcoinist.net,August
29,2015;http://bitcoinist.net/blockchain-technology-bringing-bitcoin-mainstream/.
23.MelanieSwan,quotedinAdamStone,“UnchainingInnovation:CouldBitcoin’sUnderlyingTechBea
PowerfulToolforGovernment?,”GovernmentTechnology,July10,2015;
www.govtech.com/state/Unchaining-Innovation-Could-Bitcoins-Underlying-Tech-be-a-Powerful-Tool-
for-Government.html.
24.Seeforexamplewww.partnerships.org.au/andwww.in-control.org.uk/what-we-do.aspx.
25.InterviewwithPerianneBoring,August7,2015.SeealsoJosephYoung,“8WaysGovernmentsCould
UsetheBlockchaintoAchieve‘RadicalTransparency,’”CoinTelegraph,July13,2015;

http://cointelegraph.com/news/114833/8-ways-governments-could-use-the-blockchain-to-achieve-
radical-transparency.
26.www.data.gov.
27.www.data.gov.uk.
28.BenSchiller,“ARevolutionofOutcomes:HowPay-for-SuccessContractsAreChangingPublic
Services,”Co.Exist,www.fastcoexist.com/3047219/a-revolution-of-outcomes-how-pay-for-success-
contracts-are-changing-public-services.Alsosee:www.whitehouse.gov/blog/2013/11/20/building-
smarter-more-efficient-government-through-pay-success.
29.R.C.Porter,“CanYou‘Snowden-Proof’theNSA?:HowtheTechnologyBehindtheDigitalCurrency
—Bitcoin—CouldStoptheNextEdwardSnowden,”Fortuna’sCorner,June3,2015;
http://fortunascorner.com/2015/06/03/can-you-snowden-proof-the-nsa-how-the-technology-behind-the-
digital-currency-bitcoin-could-stop-the-next-edward-snowden/.
30.ElliotMaras,“LondonMayoralCandidateGeorgeGallowayCallsforCityGovernmenttoUseBlock
ChainforPublicAccountability,”BitcoinNews,July2,2015;www.cryptocoinsnews.com/london-
mayoral-candidate-george-galloway-calls-city-government-use-block-chain-public-accountability/.
31.Tapscott,TheDigitalEconomy,304.
32.AlGore,speechtotheWeMediaconference,October6,2005;
www.fpp.co.uk/online/05/10/Gore_speech.html.
33.Ibid.
34.“ThePersistenceofConspiracyTheories,”TheNewYorkTimes,April30,2011;
www.nytimes.com/2011/05/01/weekinreview/01conspiracy.html?pagewanted=all&_r=0.
35.www.nytimes.com/2014/07/06/upshot/when-beliefs-and-facts-collide.html?
module=Search&mabReward=relbias:w;%201RI:6%20%3C{:}%3E.
36.“PlainLanguage:It’stheLaw,”PlainLanguageActionandInformationNetwork,n.d.:
www.plainlanguage.gov/plLaw/,accessedNovember30,2015.
37.https://globalclimateconvergence.org/news/nyt-north-carolinas-election-machine-blunder.
38.http://users.encs.concordia.ca/~clark/papers/2012_fc.pdf.
39.http://link.springer.com/chapter/10.1007%2F978-3-662-46803-6_16.
40.http://blogs.wsj.com/digits/2015/07/29/scientists-in-greece-design-cryptographic-e-voting-platform/.
41.http://nvbloc.org/.
42.http://cointelegraph.com/news/114404/true-democracy-worlds-first-political-app-blockchain-party-
launches-in-australia.
43.www.techinasia.com/southeast-asia-blockchain-technology-bitcoin-insights/.
44.Ibid.
45.www.washingtonpost.com/news/wonkblog/wp/2014/08/06/a-comprehensive-investigation-of-voter-
impersonation-finds-31-credible-incidents-out-of-one-billion-ballots-cast/.
46.www.eac.gov/research/election_administration_and_voting_survey.aspx.
47.http://america.aljazeera.com/opinions/2015/7/most-americans-dont-vote-in-elections-heres-why.html.
48.InterviewwithEduardoRoblesElvira,September10,2015.
49.www.chozabu.net/blog/?p=78.
50.https://agoravoting.com/.
51.InterviewwithEduardoRoblesElvira,September10,2015.
52.http://cointelegraph.com/news/111599/blockchain_technology_smart_contracts_and_p2p_law.
53.PatentApplicationofDavidChaum,“RandomSampleElections,”June19,2014;
http://patents.justia.com/patent/20140172517.
54.https://blog.ethereum.org/2014/08/21/introduction-futarchy/.
55.FedericoAst(@federicoast)andAlejandroSewrjugin(@asewrjugin),“TheCrowdJury,a
CrowdsourcedJusticeSystemfortheCollaborationEra,”https://medium.com/@federicoast/the-
crowdjury-a-crowdsourced-court-system-for-the-collaboration-era-66da002750d8#.e8yynqipo.
56.http://crowdjury.org/en/.

57.TheentireprocessisdescribedinAstandSewrjugin,“TheCrowdJury.”
58.AbriefdescriptionofthejuryselectionprocessinearlyAthensisdescribedat
www.agathe.gr/democracy/the_jury.html.
59.Seefullreportandrecommendationshere,includingadescriptionofmodelsworldwide:
www.judiciary.gov.uk/reviews/online-dispute-resolution/.
60.http://blog.counter-strike.net/index.php/overwatch/.
61.EnvironmentalDefenseFund,www.edf.org/climate/how-cap-and-trade-works.
62.Swan,Blockchain:BlueprintforaNewEconomy.
63.InterviewwithAndreasAntonopoulos,July20,2015.
Chapter9:FreeingCultureontheBlockchain:MusictoOurEars
1.“2015WomeninMusicHonoursAnnounced,”MOnline,PRSforMusic,October22,2015;www.m-
magazine.co.uk/news/2015-women-in-music-honours-announced/,accessedNovember21,2015.
2.InterviewwithImogenHeap,September16,2015.
3.DavidByrne,“TheInternetWillSuckAllCreativeContentOutoftheWorld,”TheGuardian,June20,
2014;www.theguardian.com/music/2013/oct/11/david-byrne-internet-content-world,accessedSeptember
20,2015.
4.InterviewwithImogenHeap,September16,2015.
5.In-personconversationbetweenPaulPacificoandDonTapscottatthehomeofImogenHeap,November
8,2015.
6.“HideandSeek,”performedbyArianaGrande,YouTube,LoveArianaGrandeChannel,October17,
2015;www.youtube.com/watch?v=2SDVDd2VpP0,accessedNovember21,2015.
7.InterviewwithImogenHeap,September16,2015.
8.DavidByrne,etal.,“OnceinaLifetime,”RemaininLight,TalkingHeads,February2,1981.
9.InterviewwithImogenHeap,September16,2015.
10.JohanNylander,“RecordLabelsPartOwnerofSpotify,”TheSwedishWire,n.d.;
www.swedishwire.com/jobs/680-record-labels-part-owner-of-spotify,accessedSeptember23,2015.
AccordingtoNylander,Sonyhad5.8percent,Universal4.8percent,andWarner3.8percent.Beforeits
sell-off,EMIhada1.9percentstake.
11.InterviewwithImogenHeap,September16,2015.
12.DavidJohnson,“SeeHowMuchEveryTopArtistMakesonSpotify,”Time,November18,2014;
http://time.com/3590670/spotify-calculator/,accessedSeptember25,2015.
13.MicahSingleton,“ThisWasSonyMusic’sContractwithSpotify,”TheVerge,May19,2015;
www.theverge.com/2015/5/19/8621581/sony-music-spotify-contract,accessedSeptember25,2015.
14.StuartDredge,“StreamingMusic:WhatNextforApple,YouTube,Spotify...andMusicians?,”The
Guardian,August29,2014;www.theguardian.com/technology/2014/aug/29/streaming-music-apple-
youtube-spotify-musicians,accessedAugust14,2015.
15.EdChristman,“UniversalMusicPublishing’sRoyaltyPortalNowAllowsWriterstoRequest
Advance,”Billboard,July20,2015;www.billboard.com/articles/business/6634741/universal-music-
publishing-royalty-window-updates,accessedNovember24,2015.
16.RobertLevine,“DataMiningtheDigitalGoldRush:FourCompaniesThatGetIt,”Billboard127(10)
(2015):14–15.
17.InterviewwithImogenHeap,September16,2015.
18.ImogenHeap,“PanelSession,”GuardianLive,“LiveStream:ImogenHeapReleasesTinyHuman
UsingBlockchainTechnology,SonosStudioLondon,”October2,2015;
www.theguardian.com/membership/2015/oct/02/live-stream-imogen-heap-releases-tiny-human-using-
blockchain-technology.PassageeditedbyImogenHeap,e-mail,November27,2015.
19.Ibid.

20.InterviewwithAndreasAntonopoulos,July20,2015.
21.InterviewwithImogenHeap,September16,2015.
22.Ibid.
23.StuartDredge,“HowSpotifyandItsDigitalMusicRivalsCanWinOverArtists:‘JustIncludeUs,’”
TheGuardian,October29,2013;www.theguardian.com/technology/2013/oct/29/spotify-amanda-palmer-
songkick-vevo,accessedAugust14,2015.
24.GeorgeHoward,“BitcoinandtheArts:AnInterviewwithArtistandComposer,ZoeKeating,”Forbes,
June5,2015;www.forbes.com/sites/georgehoward/2015/06/05/bitcoin-and-the-arts-and-interview-with-
artist-and-composer-zoe-keating/,accessedAugust14,2015.
25.Ibid.
26.JosephYoung,“MusicCopyrightsStoredontheBitcoinBlockChain:RockBand22HERTZLeadsthe
Way,”CoinTelegraph,May6,2015;http://cointelegraph.com/news/114172/music-copyrights-stored-on-
the-bitcoin-blockchain-rock-band-22hertz-leads-the-way,accessedAugust14,2015.
27.Pressrelease,“ColuAnnouncesBetaLaunchandCollaborationwithRevelatortoBringBlockchain
TechnologytotheMusicIndustry,”BusinessWire,August12,2015.
28.GideonGottfried,“How‘theBlockchain’CouldActuallyChangetheMusicIndustry,Billboard,
August5,2015;www.billboard.com/articles/business/6655915/how-the-blockchain-could-actually-
change-the-music-industry.
29.PeerTracksInc.,September24,2015;http://peertracks.com/.
30.“AboutUs,”Artlery:ModernArtAppreciation,September3,2015;https://artlery.com.
31.EllenNakashima,“TechGiantsDon’tWantObamatoGivePoliceAccesstoEncryptedPhoneData,”
WashingtonPost,WPCompanyLLC,May19,2015;www.washingtonpost.com/world/national-
security/tech-giants-urge-obama-to-resist-backdoors-into-encrypted-
communications/2015/05/18/11781b4a-fd69-11e4-833c-a2de05b6b2a4_story.html.
32.DavidKaye,“ReportoftheSpecialRapporteuronthePromotionandProtectionoftheRightto
FreedomofOpinionandExpression,”HumanRightsCouncil,UnitedNations,Twenty-ninthsession,
Agendaitem3,advanceeditedversion,May22,2015;
www.ohchr.org/EN/Issues/FreedomOpinion/Pages/CallForSubmission.aspx,accessedSeptember25,
2015.
33.TheUNreportrefersreaderstotheCentreforInternationalGovernanceInnovationandChatham
House,TowardaSocialCompactforDigitalPrivacyandSecurity:StatementbytheGlobalCommission
onInternetGovernance(2015).
34.TheSocialProgressImperative,SocialProgressIndex2015,April14,2015;
www.socialprogressimperative.org/data/spi#data_table/countries/com9/dim1,dim2,dim3,com9,accessed
September24,2015.Ourrankingisderivedfromthecomponentscores,notfromtheoverallopportunity
score.
35.“RegimesSeekingEverMoreInformationControl,”2015WorldPressFreedomIndex,Reporters
WithoutBorders,2015;http://index.rsf.org/#!/themes/regimes-seeking-more-control.
36.ReportersWithoutBorders,“HasRussiaGoneSoFarastoBlockWikipedia?,”August24,2015;
https://en.rsf.org/russia-has-russia-gone-so-far-as-to-block-24-08-2015,48253.html,accessedSeptember
25,2015.
37.ScottNeuman,“ChinaArrestsNearly200over‘OnlineRumors,’”August30,2015;
www.npr.org/sections/thetwo-way/2015/08/30/436097645/china-arrests-nearly-200-over-online-rumors.
38.GetGems.org,September2,2015;http://getgems.org/.
39.“Factom:BusinessProcessesSecuredbyImmutableAuditTrailsontheBlockchain,”
www.factom.org/faq.
40.InterviewwithStephenPair,June11,2015.
41.MiguelFreitas,AboutTwister.http://twister.net.co/?page_id=25.
42.MarkHenricks,“TheBillionaireDropoutClub,”CBSMarketWatch,CBSInteractiveInc.,January24,
2011,updatedJanuary26,2011;www.cbsnews.com/news/the-billionaire-dropout-club/,accessed

September20,2015.
43.InterviewwithJoichiIto,August24,2015.
44.Ibid.
45.InterviewwithMelanieSwan,September14,2015.
46.Ibid.
47.“IntroducingUNESCO:WhatWeAre.”Web.AccessedNovember28,2015;
http://www.unesco.org/new/en/unesco/about-us/who-we-are/introducing-unesco.
Chapter10:OvercomingShowstoppers:TenImplementation
Challenges
1.LevSergeyevichTermen,“ErhöhungderSinneswahrnehmungdurchHypnose[IncreaseofSense
PerceptionThroughHypnosis],”ErinnerungenanA.F.Joffe,1970.“Theremin,Léon,”Encyclopediaof
WorldBiography,2005,Encyclopedia.com,www.encyclopedia.com,accessedAugust26,2015.
2.MaciejCeglowski,“OurComradetheElectron,”speechgivenatWebstock2014,St.JamesTheatre,
Wellington,NewZealand,February14,2014;www.webstock.org.nz/talks/our-comrade-the-electron/,
accessedAugust26,2015.Ceglowski’stalkinspiredtheopeningofthischapter.
3.InterviewwithAndreasAntonopoulos,July20,2015.
4.InterviewwithTylerWinklevoss,June9,2015.
5.SatoshiNakamoto,P2pfoundation.ning.com,February18,2009.
6.KenGriffithandIanGrigg,“BitcoinVerificationLatency:TheAchillesHeelforTimeSensitive
Transactions,”whitepaper,February3,2014;http://iang.org/papers/BitcoinLatency.pdf,accessedJuly
20,2015.
7.InterviewwithIzabellaKaminska,August5,2015.
8.Ibid.
9.PrimaveraDeFilippiandAaronWright,“DecentralizedBlockchainTechnologyandtheRiseofLex
Cryptographia,”SocialSciencesResearchNetwork,March10,2015,43.
10.InterviewwithJoshFairfield,June1,2015.
11.IzabellaKaminska,“Bitcoin’sWastedPower—andHowItCouldBeUsedtoHeatHomes,”FT
Alphaville,FinancialTimes,September5,2014.
12.CIA,“TheWorldFactbook,”www.cia.gov,2012;http://tinyurl.com/noxwvle,accessedAugust28,
2015.NotethatCyprus’scarbongasemissionsinthesameperiodwere8.801millionmetricmegatons
(2012).
13.“AftertheBitcoinGoldRush,”TheNewRepublic,February24,2015;
www.newrepublic.com/article/121089/how-small-bitcoin-miners-lose-crypto-currency-boom-bust-cycle,
accessedMay15,2015.
14.InterviewwithBobTapscott,July28,2015.
15.InterviewwithGavinAndresen,June8,2015.
16.InterviewwithEricJennings,July10,2015.
17.InterviewwithStephenPair,June11,2015.
18.InterviewwithErikVoorhees,June16,2015.
19.SangjinHan,“OnFairComparisonBetweenCPUandGPU,”blog,February12,2013;
www.eecs.berkeley.edu/~sangjin/2013/02/12/CPU-GPU-comparison.html,accessedAugust28,2015.
20.InterviewwithBobTapscott,July28,2015.
21.InterviewwithValeryVavilov,July24,2015.
22.HassMcCook,“UndertheMicroscope:EconomicandEnvironmentalCostsofBitcoinMining,”
CoinDeskLtd.,June21,2014;www.coindesk.com/microscope-economic-environmental-costs-bitcoin-
mining/,accessedAugust28,2015.
23.InterviewwithBobTapscott,July28,2015.

my-mr-wanky,eBay.com,May8,2014;www.ebay.com/itm/3-Cointerra-TerraMiner-IV-Bitcoin-Miner-
1-6-TH-s-ASIC-Working-Units-in-Hand-/331192098368,accessedJuly25,2015.
“PCRecycling,”MRIofAustralia,MRI(Aust)PtyLtd.Web.August28,2015;
http://www.mri.com.au/pc-recycling.shtml.
InterviewwithGavinAndresen,June8,2015.
VitalikButerin,“ProofofStake:HowILearnedtoLoveWeakSubjectivity,”Ethereumblog,
November25,2014;https://blog.ethereum.org/2014/11/25/proof-stake-learned-love-weak-subjectivity/.
StefanThomasandEvanSchwartz,“RippleLabs’W3CWebPayments,”positionpaper,March18,
2014;www.w3.org/2013/10/payments/papers/webpayments2014-submission_25.pdf.
InterviewwithAustinHill,July22,2015.
InterviewwithRogerVer,April30,2015.
SatoshiNakamoto,“Re:BitcoinP2PE-cashPaper,”TheMailArchive,November7,2008;www.mail-
archive.com/,http://tinyurl.com/oofvok7,accessedJuly13,2015.
InterviewwithJoshFairfield,June1,2015.
InterviewwithStephenPair,June11,2015.
InterviewwithJerryBrito,June29,2015.
Ibid.
InterviewwithJoshFairfield,June1,2015.
InterviewwithAndreasAntonopoulos,July20,2015.
InterviewwithIzabellaKaminska,August5,2015.
InterviewwithStephenPair,June11,2015.
AndrewVegetabile,“AnObjectiveLookintotheImpactsofForkingBlockchainsDuetoMalicious
Actors,”TheDigitalCurrencyCouncil,July9,2015;www.digitalcurrencycouncil.com/professional/an-
objective-look-into-the-impacts-of-forking-blockchains-due-to-malicious-actors/.
InterviewwithKeonneRodriguez,May11,2015.
Vegetabile,“AnObjectiveLook.”
PeterTodd,“Re:[Bitcoin-development]Fwd:BlockSizeIncreaseRequirements,”TheMailArchive,
June1,2015;www.mail-archive.com/,http://tinyurl.com/pk4ordw,accessedAugust26,2015.
SatoshiNakamoto,“Re:BitcoinP2PE-cashPaper,”MailingList,Cryptography,Metzger,Dowdeswell
&Co.LLC,November11,2008.Web.July13,2015,
www.metzdowd.com/mailman/listinfo/cryptography.
PascalBouvier,“DistributedLedgersPartI:BitcoinIsDead,”FiniCultureblog,August4,2015;
http://finiculture.com/distributed-ledgers-part-i-bitcoin-is-dead/,accessedAugust28,2015.
WesternUnion,“CompanyFacts,”WesternUnion,WesternUnionHoldings,Inc.,December31,2014.
Web.January13,2016;http://corporate.westernunion.com/Corporate_Fact_Sheet.html.
InterviewwithGavinAndresen,June8,2015.
Ibid.
InterviewwithAustinHill,July22,2015.
InterviewwithGavinAndresen,June8,2015.
AndreasAntonopoulos,“BitcoinasaDistributedConsensusPlatformandtheBlockchainasaLedger
ofConsensusStates,”interviewwithAndreasAntonopoulos,December9,2014.
AndyGreenberg,“HackersRemotelyKillaJeepontheHighway—withMeinIt,”Wired,July21,

InternationalJointConferenceonArtificialIntelligence,July28,2015,BuenosAires,Argentina;
http://futureoflife.org/AI/open_letter_autonomous_weapons#signatories.
LisaSingh,“FatheroftheInternetVintCerf’sForecastfor‘InternetofThings,’”WashingtonExec,
August17,2015.
InterviewwithKeonneRodriguez,May11,2015.
Ceglowski,“OurComradetheElectron.”
InterviewwithAnnCavoukian,September2,2015.

Ceglowski,“OurComradetheElectron.”
http://www.lightspeedmagazine.com/nonfiction/interview-marc-goodman/.
MarcGoodman,FutureCrimes:EverythingIsConnected,EveryoneIsVulnerable,andWhatWeCan
DoAboutIt(NewYork,Doubleday,2015).
InterviewwithSteveOmohundro,May28,2015.
TheSilverStallion,chapter26;www.cadaeic.net/cabell.htm,accessedOctober2,2015.
InterviewwithYochaiBenkler,August26,2015.
Chapter11:LeadershipfortheNextEra
StephanTual,“AnnouncingtheNewFoundationBoardandExecutiveDirector,”Ethereumblog,
EthereumFoundation,July30,2015;https://blog.ethereum.org/2015/07/30/announcing-new-foundation-
board-executive-director/,accessedDecember1,2015.
Ethereum:TheWorldComputer,producedbyEthereum,YouTube,July30,2015;
www.youtube.com/watch?v=j23HnORQXvs,accessedDecember1,2015.
InterviewwithVitalikButerin,September30,2015.
Ibid.
Ibid.
Ibid.
HenryVI,part2,act4,scene2.
E-mailcorrespondencewithVitalikButerin,October1,2015.
DavidD.Clark,“ACloudyCrystalBall,”presentation,IETF,July16,1992;
http://groups.csail.mit.edu/ana/People/DDC/future_ietf_92.pdf.
InterviewwithBrianForde,June26,2015.
InterviewwithErikVoorhees,June16,2015;interviewwithAndreasAntonopolous,July20,2015.
InterviewwithErikVoorhees,June16,2015.
InterviewwithJimOrlando,September28,2015.
http://www.coindesk.com/bitcoin-venture-capital/.
E-mailcorrespondencewithTimDraper,August3,2015.
InterviewwithGavinAndresen,June8,2015.
Ibid.
InterviewwithBrianForde,June26,2015.
InterviewwithJoichiIto,August24,2015.
InterviewwithJerryBrito,June29,2015.
Ibid.
www.cryptocoinsnews.com/us-colleges-universities-offering-bitcoin-courses-fall/.
InterviewwithAdamDraper,May31,2015.
InterviewwithBenjaminLawsky,July2,2015.
InterviewwithPerianneBoringatMoney2020,October26,2015.
InterviewwithJoichiIto,August24,2015.
InterviewwithBlytheMasters,July29,2015.
ForafulllistofallthemajorvictoriesLawskyachievedwhilesuperintendentofNYDFS,pleasevisit
www.dfs.ny.gov/reportpub/2014_annualrep_summ_mea.htm.
InterviewwithBenjaminLawsky,July2,2015.
Ibid.
Ibid.
InterviewwithJerryBrito,June29,2015.
InterviewwithBenjaminLawsky,July2,2015.
Ibid.

Requiredreadingforanyonelookingforafreshtakebyatypicallyconservativegovernmentbody:
www.parl.gc.ca/Content/SEN/Committee/412/banc/rep/rep12jun15-e.pdf.
Ibid.
InterviewwithSenatorDougBlackofCanada,July8,2015.
Ibid.
Ibid.
Ibid.
Ibid.
InterviewwithAaronWright,August10,2015.
InterviewwithJoshFairfield,June1,2015.
TheFederalReservewasnotthefirstnationalbankintheUnitedStates.TheFirstNationalBank,
broughtintoexistencebyCongressin1791,andarchitectedbytheUnitedStates’firstsecretaryofthe
treasury,AlexanderHamilton,wasfarmorelimitedinscopeandPresidentAndrewJacksonultimately
dismantleditssuccessor,theSecondNationalBank,in1836.
InterviewwithCarolynWilkins,August27,2015.
http://qz.com/148399/ben-bernanke-bitcoin-may-hold-long-term-promise/.
InCanada:www.bankofcanada.ca/wpcontent/uploads/2010/11/regulation_canadian_financial.pdf;in
theUnitedStates:www.federalreserve.gov/pf/pdf/pf_5.pdf.
InterviewwithCarolynWilkins,August27,2015.
“MoneyinaDigitalWorld,”remarksbyCarolynWilkins,SeniorDeputyGovernoroftheBankof
Canada,WilfredLaurierUniversity,Waterloo,Ontario,November13,2014.
InterviewwithCarolynWilkins,August27,2015.
Ibid.
InterviewwithJerryBrito,June29,2015.
InterviewwithSteveBeauregard,April30,2015.
InterviewwithJerryBrito,June29,2015.
DonTapscottandLynneSt.Amour,“TheRemarkableInternetGovernanceNetwork—PartI,”Global
SolutionNetworksProgram,MartinProsperityInstitute,UniversityofToronto,2014.
E-mailcorrespondencewithVintCerf,June12,2015.
www.w3.org/Payments/.
www.intgovforum.org/cms/wks2015/index.php/proposal/view_public/239.
www.internetsociety.org/inet-bangkok/speakers/mr-pindar-wong.
AdamKillick,“KnowledgeNetworks,”GlobalSolutionNetworksProgram,MartinProsperityInstitute,
UniversityofToronto,2014.
InterviewwithJerryBrito,June29,2015.
InterviewwithTylerWinklevoss,June9,2015.
InterviewwithJoichiIto,August24,2015.
http://coala.global/?page_id=13396.
www.digitalchamber.org/.
https://blog.coinbase.com/2014/10/13/welcome-john-collins-to-coinbase/.
http://www.digitalchamber.org/assets/press-release---g7---for-website.pdf.
AnthonyWilliams,“PlatformsforGlobalProblemSolving,”GlobalSolutionNetworksProgram,
MartinProsperityInstitute,UniversityofToronto2013.
InterviewwithBrianForde,June26,2015.
InterviewwithGavinAndresen,June8,2015.
www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf,7.
InterviewwithConstanceChoi,April10,2015.
Thedigitalrevolutionhasmovedonto“thesecondhalfofthechessboard”—acleverphrasecoinedby
theAmericaninventorandauthorRayKurzweil.HetellsastoryoftheemperorofChinabeingso
delightedwiththegameofchessthatheofferedthegame’sinventoranyrewardhedesired.Theinventor

askedforrice.“Iwouldlikeonegrainofriceonthefirstsquareofthechessboard,twograinsofriceon

thesecondsquare,fourgrainsofriceonthethirdsquare,andsoon,allthewaytothelastsquare,”he

said.Thinkingthiswouldadduptoacouplebagsofrice,theemperorhappilyagreed.Hewasmisguided.

Whilesmallattheoutset,theamountofriceescalatestomorethantwobilliongrainshalfwaythrough

thechessboard.Thefinalsquarewouldrequireninebillionbilliongrainsofrice—enoughtocoverallof

Earth.

74.E-mailinterviewwithTimothyDraper,August3,2015.

75.InterviewwithHernandodeSoto,November27,2015.

INDEX
Thepagenumbersinthisindexrefertotheprintedversionofthisbook.Thelinkprovidedwilltakeyouto
thebeginningofthatprintpage.Youmayneedtoscrollforwardfromthatlocationtofindthe
correspondingreferenceonyoure-reader.
Abra,20,186–88,325n
Academicinstitutions
asplayersinblockchainecosystem,286
roleinculture,246–49
Accenture,69,70
Accessibility,256–57
Accountability,10,30,108–9,303
inforeignaid,20–21,190–91
ingovernment,23,199,202,207–9,309
inmicrofinance,192
Accounting,63,64,73–79
double-entry,7,74,75,310
triple-entry,77,78–79,180
WorldWideLedger,6–8,75–77,142
Accountingfraud,74,76
AccountingWEB,74
Adams,Scott,106
Advocacynetworks,302–3
Agencycosts,107
Agencyrisk,60
Agenda,fornextdigitalage,307–9
Aggregatingeconomy,17–18,134–35,164–65
AgoraVoting,218–19
Agriculture,138–39,157–58
Airbnb,17,18,115–17,134,135,270
Allaire,Jeremy,71–72,75–76
Allianz,156
AlliedControl,261
Altcoins,60,257
Amazon,13,72–73,118,122,123
AmericanAssociationofIndependentMusic,230
AmericanSocietyofComposers,AuthorsandPublishers(ASCAP),229
Andreessen,Marc,5,9,80,311
AndreessenHorowitz,178–79,284
Andresen,Gavin,51,104,285,305

implementationchallenges,257,260,262,271–72
Angaritis,DinoMark,31–32,115,131,153
Animatingobjects,22,155,156–61
Anti–moneylaundering/knowyourcustomer(AML/KYC),42,44,302
Antonopoulos,Andreas,70,125,128,225,233,255
designprinciples,40,47–48
digitalidentity,15,264–65
re-architectingthefirm,86,96,97,98,102
AOL,255
Apple,13,118,150,161,229,235
Applicationspecificintegratedcircuits(ASICs),261
ArabSpring,200
Ariely,Dan,279
Art(artists),21,239–43
buyingthroughbitcoinblockchain,240–42
ownershiprights,45–49,132–33
profileofnext-genpatron,242–43
Artificialintelligence(AI),91,123,265,274
Artist-centricmusicmodel,231–35
Artistsandrepertoire(A&R),238–39
Artlery,239–43
Ascribe,132–33,243
Assetownership,19–20,193–95
Asymmetriccryptography,39–40
Athey,Susan,111
Attentionmarkets,140–41
Attestation,infinancialservices,56,57,58
Auction/dynamicpricingmechanisms,234
Audits,6–7,63,75–77,78
Augur,82,83,84–85,181,220,224
Australianoutback,powerpoles,145,146–47
Authenticatingidentityandvalue,infinancialservices,61,64
AutomatedClearingHouse(ACH),59,293
Automatedsubsidiaryrightsmanagement,234
Autonomousagents,22,120,121,122–25,126,321–22n
Autonomousvehicles,156–57,165–67
Back,Adam,34,41
“Backdooraccess,”244
Backgroundchecks,176
bAirbnb,115–17
Balanc3,76,178
Bandcamp,235
BankofCanada,9,294,296
BankofEngland,9,294
Bankruptcylaws,174
Banks.SeealsoCentralbanks;Financialservices
unbankedandunderbanked,170–72,175–78
Barclays,68–69,75

BarclaysAccelerator,68–69
Barhydt,Bill,187–88
Beauregard,Steve,297
Behavioralchange,257
Bengloff,Rich,230
Benkler,Yochai,94,107,277
newbusinessmodels,129–30,134,135,139
Bernanke,Ben,294
Berners-Lee,Tim,281
BigBrother,244,274–75
Bigdata,44,151,225
BigSeven,128–42
Birch,David,177
Bitcoin,5–10,278–79
buyingartthroughblockchain,240–43
designprinciples.SeeDesignprinciples
implementationchallenges.SeeImplementationchallenges
theplayers,283–89
BitcoinFoundation,305
BitcoinLightningNetwork,59,288
BitcoinMagazine,279
BitcoinWeekly,279
BitcoinXT,271–72
BitFury,261
BitGo,287,303
BitLicense,286,291
BitMoby,50–51
BitPay,48,72,246,260,263,266
BitTorrent,34,119,246
Black,Doug,292–93
BlackBerry,150
Blackboxmarketing,97
Blackboxofidentity,14–16
Blockapedia,131,224
Blockchain
distributedledgertechnology,6–8,18
governancenetwork,298–308
howitworks,6–8
implementationchallenges.SeeImplementationchallenges
planforprosperity,17–23
playersinecosystem,283–89
promiseandperilof,24–26
rationalexuberancefor,8–10
sevendesignprinciples.SeeDesignprinciples
BlockchainAlliance,303–4
Blockchaincooperatives,134–35
BlockchainIPOs,82–84,127,180,181
Blockchainjudiciary,220–21
Blockchainmakers,138–39
Blockchainvoting,215–17

Blockcom,90,127
BlockingWebsites,244–45
Blockstream,28,38,65–66
Blocktime,255–57
Bootstrapping,34
Boring,Perianne,208,287,288
Boundarychanges,92–109
Boundarydecisions,109–14
Bouvier,Pascal,269
Brand,Stewart,129
BrettonWoodssystem,281,295–96,298
Brito,Jerry,263,264,286,287,291,297,301
BroadcastMusic,Inc.(BMI),229
Brody,Paul,33
Brown,JohnSeely,94
Brown,RichardGendal,69
BTCjam,81
Buildingmanagement,inIoTs,159–60
Businessbuilding,componentsof,179–80
Businessmodels,115–44,168
autonomousagents,122–25
bAirbnbvs.Airbnb,115–17
BigSeven,128–42
distributedapplications,117–22
distributedautonomousenterprises,126–28
hackingyourfuture,142–44
Buterin,Vitalik,87–88,262,278–80
autonomousagents,123,125
consensusmechanisms,31
futarchy,220
re-architectingthefirm,18,87–88,96,100–101
Buzzcar,137
Byrne,David,227
Byrne,Patrick,83
ByzantineGenerals’Problem,241
Cabell,JamesBranch,277
CaliforniaPublicEmployees’RetirementSystem,77
Campusmicrogrids,148
“Canonicalpersona,”16,140
Cap-and-tradesystem,222–23
CapitalintheTwenty-FirstCentury(Piketty),173,175
Carlyle,James,69
Cars,137,164–67,165–67
Cavoukian,Ann,27,28,41,42,51–52,275
CBWBank,73
Ceglowski,Maciej,254,275
Centralbanks(banking),9,31,57,286–87,293–96,309
Cerf,Vint,274,281,299

Chain(company),67–68
ChamberofDigitalCommerce,208,287,288,302,303
Change.org,304
Chase,Robin,137
Chaum,David,4,219
Chesky,Brian,135
China,13,56,174,243–45,264,266–67,272
Choi,Constance,288,307
Christie,Chris,98
Circle,83,284
CircleInternetFinancial,71–72
CiscoQuad,139
CivilJusticeCouncil,U.K.,221
Clark,David,281
Clark,Jeremy,215
Climatechange,149,221–23
Cloudcomputing,118,122
CoalitionforAutomatedLegalApplications(COALA),301–2,303
Coase,Ronald,74,92–93,100,105,121,142,319n
Cohen,Bram,119,262
Coinbase,44,83–84,284,302
CoinCenter,286,287,302,303
CoinPip,217
Collaboration,139–42
Collins,John,302
Colu,238
CommitCoin,215
“Commons-basedpeerproduction,”129
Competitiveadvantage,64,66,110–11,140
Complexinstructionsetcomputer(CISC),260–61
CompuServe,118
Computerviruses,122,123
Computing,evolutionof,150–52
Conflictadjudication,100,105,219,221
Conflictsofinterest,100,125
Consensusmechanisms,30–33,36–37,95,98,262,266,305
ConsensusSystems(ConsenSys),15,87–92,99,101,112–14,130
Consideration,10,30
Conspiracytheories,213
ContentID,235
Contractbreaches,104,258
Contractingcosts,99–101
Contracts.SeeSmartcontracts
Coordinationcosts,92,93,105–7,121,142,166
Copyright,45–49,132–33,228–31,234,236,237–38
Corecompetencies,110–12
Corporateboundaries
changing,92–109
determining,109–14
Corporategovernance,infinancialservices,73–79

Corporations,reconfiguringasengineofcapitalism,21–22.SeealsoNewbusinessmodels;Re-architecting
thefirmCorruption,19,20–21,50,188–89,193–94,195–96
Counterpartyrisk,59
Coursera,248–49
Creativeindustries.SeeArt;Music
Creditcards,4,36,42–43,62,79
Creditscores,62,79–82,177
Criminaluses,4,9,128,275–76,303
CrisisCommons,189
Crowdfunding,82–83,128,181,245–46
CrowdJury,220–21
Cryptocurrencies,5,9–10
Cryptoeconomics,119,321n
Culture,21,226–50.SeealsoArt;Musicontheblockchain,249–50
privacy,freespeechandfreepress,243–46
roleofeducation,246–49
Cuomo,Andrew,289
Cyberclones,42
Dataanalytics,233–34
Databreaches,39,43,92,118,151–52
Datamining,36
David,Paul,57
Decentralization,91–92,106–7,117–18,162–63,293–96
DeclarationofIndependence,19
DeclarationofInterdependence,308–9
Deegan,Patrick,81
DeFilippi,Primavera,258,264,265,288
Delegativedemocracy,218–19
Deliberativepolling,223
Deliverynetworks,301–2
Deloitte,68,76–77,78
Democracy,9,13,23.SeealsoGovernments;Votingalternativemodelsofpoliticsandjustice,218–21
ontheblockchain,214–15
engagingcitizenstosolvebigproblems,221–23
seconderaof,211–15
toolsoftwenty-first-century,223–25
Democratizedentrepreneurship,179–81
DEMOS,215–16
Desertification,149–50
Designprinciples,29–52
distributedpower,33–35
ingovernment,201–3
inclusion,49–51
networkedintegrity,30–33
privacy,41–56
rightspreserved,45–49
security,39–41
valueasincentive,35–39

DeSoto,Hernando
citizenrights,200,201,310
economicrights,19–20,56,174,178,193,194,310
Developers,asplayersinblockchainecosystem,285
Diasporas,306–7
Dictator’slearningcurve,265
DigiCash,4,247
DigitalAssetHoldings,63,65
Digitalbrainstorming,223
Digitalcertificates,40
Digitalcontentmanagementsystem,238
DigitalCurrencyAssociation,U.K.,302
DigitalCurrencyGroup,86,284
DigitalCurrencyInitiative(DCI),247,282,284,286,301,303,305
DigitalEconomy,The(Tapscott),164,212,309
Digitalidentity,15–16,140,176,177–78,197–98,203–4,264–65
Digitalregistryofartwork,132–33,242–43
Digitalrightsmanagement(DRM),132,234
DilbertPrinciple,The(Adams),106
Directdemocracy,214,218
Diseasemanagement,151,158
Disney,Walt,246
Disputeresolution,100,105,193,219,221
Distributedapplications(DApps),117–22
bAirbnb,115–17
Distributedautonomousenterprises(DAEs),22,120,121,126–28,143–44,273–74
Distributedcapitalism,25,49,163
Distributedledgers,6–8,18,64,65,156,181,208–9
Distributedpower,33–35,202
Distributeduseraccounts,37
Documentkeeping,159,205
Domingo,Analie,182–83,186–87,325n
Double-entryaccounting,7,74,75,310
Double-spendproblem,30–31,132
Downey,Paul,205
Draper,Adam,286–87
Draper,Tim,284,310
Drugtherapies,151,158
Dylan,Bob,110
ECash,4
Economicpower,12–13,172–75
Economicrights,19–20,45–49,132–34,172,175
Edelman’sTrustBarometer,10
Education
playersinblockchainecosystem,286
roleinculture,246–49
Edwards,Jim,200
Electricityconsumptionofblockchain,24,259–63

Electronicvoting(e-voting),198,215–17
Ellipse(album),227–28
Emergencyservices,inIoTs,158
Empowerment,107,208
Encryption,28,40,243–44,314n
End-to-end(E2E)e-votingsystems,215–16
Energyconsumptionofblockchain,24,259–63
Energygrids,145–50
Energymanagement,inIoT,157
Enigma,27–28
Enterprisecollaborators,139–42
Entrepreneurship,22–23,179–81
EnvironmentalDefenseFund,222
Environmentalmonitoring,inIoTs,158
Epigraph,194
Ernst&Young,33,36
Essex,Aleks,215
Estonia,197–99,203,204,206–7
Ethereum,37,83,87–88,119,262,278,279–80
Exchangingvalue,infinancialservices,62,64
ExecutiveOrder6102,258
Facebook,13,81,118,140,180,246
Factom,94,194,245–46
FactoryofThings,160
Faircompetition,93–94
Fairfield,Josh,34,263,264,293
Fairtrademusic,227–39
Farming,157–58
FeaturedArtistsCoalition,226
FederalReserve,U.S.,57,174,293,294
FedEx,147
Fiatcurrencies,217,255,292,293–96
cryptocurrenciesvs.,5,38,256,260
FICOscore,80,82
51percentattack,67,266–67,269
Filament,146–48,157,260
Financialaidforstudents,248–49
Financialcrisisof2008,5,10,56,108,193,293,296
Financialidentity,15–16,140,176,177–78,179
Financialinclusion,asfundamentalright,19–20,172,175
Financialintermediaries,56,57,58,61
Financialleverage,56
Financialrisk,59–60,63,64
Financialservices,55–86.SeealsoMicrofinance
blockchainIPOs,82–84
blockchaintransformationsof,8,18–19,58–63,64,128
frameworksforaccountingandcorporategovernance,73–79
GoldenEightof,61–63,64,86

identityissues,61,64,78–79
paradoxesoftraditionalfinance,55–57
playersinblockchainecosystem,285
predictionmarkets,84–85
reputationandcreditscore,79–82
retailservices,71–73
smartdevicesandIoT,159
fromstockexchangestoblockexchanges,63,65–66
Financialstability,295
Financialutility,69–70
FirefoxWeb,129
FirsteraoftheInternet,3–4,12–14,15,39,49,92,95,106,124,265,281–82,299–300
“Float,”45
FNYCapital,83
Foodindustry,138–39,157–58
Ford,Henry,246
Forde,Brian,247,282,286,287,305
Foreignaid,20–21,188–92
Formationcosts,179
Fragmentingpublicdiscourse,212–13
Freeagentnation,110
FreedomofInformationlaws,208–9
Freepress,243–46
Freespeech,243–46
Freitas,Miguel,246
Funding,infinancialservices,62–63,64
Fund-raising,179
Futarchy,220
FutureCrimes(Goodman),276
Future-proofing,152,197
GalaxyZoo,12
Gauck,Joachim,52
Gault,Mike,199
Gemini,284,291
Gems,94–95
Genderdifferences,inbankingaccess,178,192
Germany,27,51–52
GetGems,245
Gibson,William,255
GitHub,89,138
Globalsolutionnetworks(GSNs),283,300–307
Globalstandardsnetworks,304–6
“GodProtocol,The”(Szabo),4–5
Gold,34,95,199,254,260
GoldcorpChallenge,223
GoldenEight,61–63,64,86
GoldmanSachs,66,70,71,284
Goodman,Marc,276

Google,13,96,118,140,143,161,180,255,270,275
Gore,Al,212
Governance,24,283,288–89,307
distributedpower,33–35,273
infinancialservices,73–79
newframeworkforblockchain,298–307
regulationsvs.,296–97
GovernmentDigitalService,U.K.,205
Governments,9,13,23,197–225
alternativemodelsofpoliticsandjustice,218–21
BigBrother,244,274–75
blockchainvoting,215–17
designprinciplesin,201–3
empoweringpeopletoserveselvesandothers,207–11
engagingcitizenstosolvebigproblems,221–23
Estoniaexample,197–99,203,204,206–7
infinancialservicesindustry,70
high-performanceservicesandoperations,203–7
playersinblockchainecosystem,286–87
seconderaofdemocracy,211–15
stiflingortwistingbitcoin,263–65
toolsoftwenty-first-century,223–25
Grande,Ariana,228
Greifeld,Bob,65,66,84
Guardtime,199
Guez,Bruno,238
Gunrights,200–201,276
Gupta,Vinay,226,227
Hacking,39,40,41,118–19,138,151–52,243–44
boundarydecisions,112–14
businessmodelinnovation,142–44
DAEs,273–74
smartthings,168–69
Hagel,John,94
Haiti
earthquakeof2010,20–21,188–89
remittances,183
Haldane,Andrew,9
Hamel,Gary,110
Hanks,Tom,78
Hanson,Robin,220
Hashcash,34
Hashrate,241,260
Hashvalue,32
Hawking,Stephen,274
Healthcare,151,158
Heap,Imogen,21,226,227–28,229,231–35
Hearn,Mike,69,164–65,271,282

HedgeStreet,84
Hedgy,105
Herstattrisk,59–60
Hewlett-Packard,150
Hierarchies,12,88,93–101,105–6
Highlatency,256–57
Hill,Austin,28
designprinciples,38,40–41,43,51
financialservices,63,65–67,76
implementationchallenges,262,272
Holacracy,48–49,88
HollywoodStockExchange,84
Homemanagement,161,275
Homomorphicencryption,28
Honduras,193–95
Honesty,10,11
Horizontalsearch,97
Humanitarianaid,20–21,188–92
HumanRightsWatch,200
HyperledgerProject,69–70,285,305
IBM,39,111,118,129–30,150,153
IBMConnections,139
IBMInstituteforBusinessValue,163
Ideagoras,137,138
Identity,3–4,14–16,264–65.SeealsoDigitalidentityinbAirbnb,116
forcitizens,197–98,203–4
economicinclusionand,176,177–78
infinancialservices,61,64,78–79
forIoTs,147–48
personalavatars,14–16,45,99,204
privacyand,41–45
Ilves,ToomasHendrik,197
Implementationchallenges,24,195–96,253–77
BigBrotherwatchingyou,274–75
criminaluse,275–76
DAEsformingSkynet,273–74
energyconsumptionunsustainable,259–63
governingprotocols,271–72
governmentsstifleortwistit,263–65
incentivesinadequatefordistributedmasscollaboration,267
jobkiller,270–71
powerfulincumbentsusurpingit,265–67
technologynotreadyforprimetime,254–58
Inaccessibility,256–57
Incentives,35–39,130–31,202,267
Inclusion,49–51,202–3,308
economic,asfundamentalright,19–20,175
Incumbency,265–67

Independentcontractors,103–4,137–38
Industrialblockchain,154,160
Inequality,12–13,173,174,175
Infinitedata,151,162,274–75
Inflation,37–38,256
Infrastructuremanagement,157,206–7
InnoCentive,95,137–38
Inno360,95,137
In-OutMatrix,111–12,112
InstituteforBlockchainStudies,110,204,224,248
InstituteforLibertyandDemocracy,19
Insurance,63,64,116–17,159,181
Insuringvalue,infinancialservices,63,64
Integratedgovernment,203–5
Integrity,10,30–33,74,76,108,199,201–2
Intel,38,155
Intellectualpropertyrights,21
art,239–43
music,226–39
InternationalCorporationforAssignedNamesandNumbers(ICANN),271,281,300,301
InternationalLabourOrganization,172–73
InternationalMonetaryFund,183,281,295
InternationalTelecommunicationsUnion,195
Internet,firstera.SeeFirsteraoftheInternet
InternetEngineeringTaskForce(IETF),271,281,299,305
InternetGovernanceForum(IGF),300
InternetofThings(IoT),3,38,146,147–48,152–55
economicpayoffs,161–64
futuredevelopments,164–67
hackingyourfuture,168–69
publicsectoruseof,206–7
twelvedisruptions,156–61
InternetSociety,281,300
Intrade,84
Investing,infinancialservices,62–63,64
IPOs(initialpublicofferings),82–84,127,180,181
Iran,13
Ito,Joichi,246–49,286,289,301
Jaques,Elliot,106
Jennings,Eric,147–48,157,162–63,260
Jensen,Michael,100,108
Jive,139
Jobanputra,Jalak,287
Jobkiller,270–71
JPMorganChase,8,43,63
JumpstartOurBusinessStartupsAct,82–83
Jurisdictionissues,264
Justicesystem,220–21,223

Kahn,Bob,281
Kahneman,Daniel,279
Kaminska,Izabella,78,257–58,266
Karpeles,Mark,247
Kaye,David,244
Kaye,Max,216
Keating,Zoë,21,235–36,237
Kessler,Sarah,135
Keylesssignatureinfrastructure(KSI),199
Kidder,Tracy,150
Kim,Joyce,170–72,177,287
Kirby,Peter,194
Knowledgenetworks,300–301
Kulin,Haluk,43,46,48,178
Kurzweil,Ray,336n
Labormarkets,270–71
Landtitleregistration,8,19–20,51,188–89,193–95,198
Larsen,Chris,59,67
Lawenforcement,286–87
Lawprofession,102–3
Lawsky,Benjamin,8,287,289–92
Leadership,24,281–309
frameworkforgovernance,298–307
newagendafornextdigitalage,307–9
theplayers,283–89
regulationand,289–93,296–97
Lederman,Leon,4–5
LedgerofEverything,152
LedgerofThings,145–69
economicpayoffs,161–64
evolutionofcomputing,150–52
futuredevelopments,164–67
hackingyourfuture,168–69
InternetofThings,152–55
powertothepeople,146–50
twelvedisruptions,156–61
Legaldisputes,100,105,193,219,221
Legalframeworks,264
Legalrecourse,lackof,258
Lendingvalue,infinancialservices,62,64
Libertarianism,199–200,201,327n
LibraryofCongress,133
Licensedexchanges,291
Lightfoot,Gordon,29
Lighthouse,94
Lih,Andrew,131
Lincoln,Abraham,199
LinkedIn,99

Linux,12,88,129–30,141,282
LinuxFoundation,69,285
Lipset,SeymourMartin,201
Liquiddemocracy,218–19
Liquidity,256,295
Litecoin,257
LitecoinAssociation,267
Literacy,172,195,249
LiveNation,229
Livingstandards,172
Locallygeneratedpower,148,149–50
LondonSchoolofEconomics,74
LO3Energy,148,149
Lubin,Joseph,15–16,88–91,112–13,141,177–78
Ludwin,Adam,68
Lundkvist,Christian,76
Lyft,134,164
MaidSafe,95
Mainframes,150
MalaysiaAirlinesFlightMH370,213
Managers(management)
ConsenSys,89–91
publicsector,206–7
smartdevicesandIoT,157,159–60,161
ManifestofortheDigitalAge,308–9
Manila,remittances,182–83,186
Manufacturing,160,174
Marketing,searchcosts,97
Massiveopenonlinecourses(MOOCs),248–49
Masters,Blythe,8,63,65,66,68,73,287,289
McAdam,Cindy,287
McKinsey,156,163–64,169,194
McLuhan,Marshall,14
McWaters,Jesse,66,306
Meckling,William,100
Medicalrecords,158
Medici,83
Memberownership,89–91
Membersofasocialnetwork,262
Meshnetworks,123,146–47
Metaverse,38
Meteringeconomy,135–36,180,233
MHITs,50–51
Microblogging,246
Microfinance,56,170–72,191–92
currentissueswith,191–92
inclusiondesignprinciple,49–51
Nicaraguaexample,170–72,176

prosperitypassport,177,178
Microgrids,148–50
Micromonetizing,180–81,233
Microsoft,4,150,270,310
MicrosoftYammer,139–40
Millennials,174
Mi.Mu,228
Miners,30–32,240–41,260,267,268–69
Mining,240–41,259–60,268–69
Miningrate,38
MintPal,266
MITBitcoinProject,247
MITDigitalCurrencyInitiative,247,282,284,286,301,303,305
MITMediaLab,27,246–47,286,305
M-of-Nsignature,104
Monegraph,133
Monetarypolicy,37–38,56,294–95,309
Moneylaundering,176,275–76
Monks,Robert,78
Monopolies,57,93–95
Moore’slaw,4,51,307–8
Moreira,Carlos,11,14,15,154,204
Morgan,Pamela,219,287
Mornini,Tom,73–74,77
Morris,Gilbert,173
Motiondetectors,254
Movingvalue,infinancialservices,61,64
M-Pesa,176
Mt.Gox,9,247
Mugabe,Robert,216–17
Muller,Ralf,237–38
Mulligan,Mark,230
Multisignature(multisig),103–5
Multistakeholders,282,297,298–99
Murdoch,Rupert,310
Music,21,226–39
A&R,238–39
basiccopyrightregistration,236,237–38
businesscomplexity,228–31
digitalcontentmanagementsystem,238
emergenceofnewbusinessmodel,231–35
ownershiprights,45–49,132–33
self-launchedartists,235–37
smartcontracts,47,231
Musiccopyright,45–49,132–33,228–31,234,236,237–38
MusicKey,236
Musk,Elon,274
MyBarackObama.com,224

Nadex,84
Napster,21,263
NASDAQ,83–84
NASDAQLinq,65
Nathan,Oz,27–28
NationalInstituteofStandardsandTechnology,40
NationalRifleAssociation,200–201,276
NationalSecurityAgency,42,274
Naturaldisasterrelief,20–21,188–89,190–91
“NatureoftheFirm,The”(Coase),92–93
Nest,275
Networkedinstitutions,306
Networkedintegrity,10,30–33
Networkedintelligence,164
Networkeffects,51,67,175
Networkprotocol,271–72
NeutralVotingBloc(NVB),216
Newbusinessformation,rateof,173–74
Newbusinessmodels,115–44,168
autonomousagents,122–25
bAirbnbvs.Airbnb,115–17
BigSeven,128–42
distributedapplications,117–22
distributedautonomousenterprises,126–28
hackingyourfuture,142–44
NewYorkIDcards,80,176
NewYorkStateDepartmentofFinancialServices(NYDFS),287,289–92
NewYorkStockExchange(NYSE),83–84
Ng,Andrew,248
Nicaraguanmicrofinance,170–72,176
Nielsen,Jakob,51
Nielsen’slawofInternetbandwidth,51,272
Nike,136,180–81
Nodes,32,240–41
Nonces,241
Nondisclosureagreements,235
Nongovernmentorganizations(NGOs),191,287
Norton,Robert,133
OASIS,38
Obama,Barack,213,224–25
OMERSVentures,284
Omohundro,Steve,46–47,109,265,277
Onlinecitizenjuriesandpanels,223
OpenGovernment,209
Opennetworkedenterprises(ONEs),22,120,121–22,128–42
blockchaincooperatives,134–35
blockchainmakers,138–39
enterprisecollaborators,139–42

meteringeconomy,135–36
peerproducers,129–32
platformbuilders,136–38
rightscreators,132–34
Opensource,60,64,69–70,129,262,281–82
OP_RETURN,237–38
Oralagreements,99
Orlando,Jim,284
Orsini,Lawrence,148,149
Ostrom,Elinor,48
Outsourcing,12,93,95,174
Overstock,83
Ownershiprights,45–49,132–34,234
Ownersofcoin,37
Ownersofcomputingpower,37,262
Ownersofdiskstoragespace,262
Pacifico,Paul,226,227
Pacioli,Luca,74,75
Pair,Stephen,48,72,246,260,263,266
Pandit,Vikram,55,59–60
Passingrate,156
Passivecitizenry,211–12
Paul,Rand,199
“Payforsuccess”models,209–10
PayPal,6,80,94,310
Paytoscripthash(P2SH),104
Peercollaborators,139–42
Peerproducers,129–32
PeersInc.(Chase),137
Peer-to-peersharingeconomy,17–18
PeerTracks,238–39
Performancerightsorganizations(PROs),229
PermaRec,76–77
Permissionedblockchains,67–68,86
Personalavatars,14–16,45,99,204
PersonalBlackBoxCompany,43,46,48,49,81,178
Picopayments,191–92,233
Piketty,Thomas,173,175
Piscini,Eric,68,76,185
PlainWritingActof2010,213
Platformbuilders,136–38,304
Poissonprocess,32
Policingcosts,230–31
Policynetworks,302
Politicalbalkanization,212–13
Politicalparties,210–11
Politicalreputations,210–11
Porter,Michael,110–11,314n

Powergrids,145–50
Prahalad,C.K.,110
Predictionmarkets,84–85,98,220,224–25
PrettyGoodPrivacy(PGP),40
Privacy,27–28,41–45,141
bAirbnband,116
BigBrother,244,274–75
breakthrough,42–44
freespeechandfreepress,243–46
governmentand,202,204,274–75
implications,44–45
preservingrightof,48–49,202
principleof,41
problemtobesolved,41–42
PrivacyandBigDataInstitute,27,275
Privateblockchains,67–68
Procter&Gamble,95
Productivity,93,108,110,155,162
Productivityparadox,57
Proofofactivity,32
Proofofasset,38
Proofofburn,315n
Proofofcapacity,32
Proofofdisk,262
ProofofExistence(PoE),46
Proofofproperty,38
Proofofstake,32,40–41,262
Proofofstorage,32–33
Proofofwork(PoW),31,32,35,41,46,241,259,262
51percentattack,67,266–67,269
Propertymanagement,inIoTs,159–60
Propertyrecords,8,19–20,51,188–89,193–95,198
Propertyrights,19–20,48–49,188–90
Prosperity,4,17–23,182–88.SeealsoMicrofinance;Remittancesassetownership,193–95
humanitarianaid,20–21,188–92
implementationchallengesandleadershipopportunities,195–96
roadmapto,178–81
Prosperityparadox,51,172–75
Prosperitypassport,177–78
Prosperitypurgatory,175–76
Prosumers,136–37,180–81
Protocols,271–72
Publicdiscourse,212–13
Publicityrights,48–49
Publickeyinfrastructure(PKI),39–40,43
Publicledgers,242
Publicpolicyandimplementation,213–14,302
Publicvalue,partneringtocreate,209–10
Putin,Vladimir,244
Pyramidofrights,48

Quantumcomputing,277
Rajgopal,Kausik,194
Ramamurthi,Suresh,73
Random-sampleelections,219
Reagan,Ronald,199
Realestate,159–60
Re-architectingthefirm,21–22,87–114.SeealsoNewbusinessmodelsbuildingConsenSys,87–92,112–
14
changingboundariesofthefirm,92–109
determiningcorporateboundaries,109–14
Recordkeeping,159,205
Recordlabels,228–31,234–35,236
Recruitingprocess,searchcosts,96–97,98
Recyclingequipment,261–62
RedCross,20–21,188–90
Reddit,88,129,130,248,301
Redistributedcapitalism,25,49,163
Reducedinstructionsetcomputer(RISC),260–61
Regulation(regulators),9,174,289–93,295
governancevs.,296–97
playersinblockchainecosystem,286–87
roleinfinancialservicesindustry,70
WorldWideLedger,75–76
Remittances,20,59,182–88
Analie’sstory,182–83,186–87
Renewableenergy,148,149–50
ReportersWithoutBorders,244
Representativedemocracy,211–12,214–15
Reputation,12,16,37
bAirbnband,116
creditscoreand,79–82
fairmusicindustry,234
financialservices,63,64,79–82,84
networkedintegrityand,30–33
peerproductionand,130–31
political,210–11
Requestforproposal(RFP),160
Resiliency,84,148–49,154
Resourceextraction,157–58
Retailbankingservices,71–73
Retailoperationsandsales,inIoTs,161
Revelator,238
Richdatabases,233
Rightscreators,132–34,234
Rightspreservation,45–49,202
“Righttobeforgotten,”78
Ripple,32,37,94,257,262

RippleLabs,59,67
Riskmanagement,59–60,63,64,116
Rivest,Ron,320n
RoblesElvira,Eduardo,218,219
Rodriguez,Keonne,266,274
RonenV,132–33
Roosevelt,FranklinDelano,34
Rossiello,Elizabeth,287
Roth,Kenneth,200
Royalties,229–31,232,233
R3Consortium,69–70,305
Russia,9,243–44,253–54
Safaricom,176
Sales,161,179
SalesforceChatter,139
Salesforce.com,118
Santander,58
Sarbanes-OxleyAct,74
SatoshiNakamoto,5,6,133
designprinciples,29–31,34–37,39–42,50,152,282,308
implementationchallenges,256,263,269
Scalability,152,285,288
ScalingBitcoin,288
Scalingbitcoin.org,305
Scalingignorance,213
Scenarioplanning,223
Schelling,Thomas,279
Scherbius,Arthur,27
Schmidt,Eric,270
Schneider,Nathan,259
Searchcosts,95–99,121–22,142
Securehashalgorithm(SHA-256),32,40,259
Securemultipartycomputation,28
SecuritiesandExchangeCommission(SEC),83
Security,39–41,141,314n
bAirbnband,116
breakthrough,39–41
governmentand,202
implications,41
principleof,39
problemtobesolved,39,255
Self-AwareSystems,46
Self-launchedmusicians,235–37
Self-service,207–11
Sequencesearch,97
Serialexpropriation,200
Serviceaggregators,17–18,134–35,164–65
SETLcoin,70

Settlementrisk,59
Sevendesignprinciples.SeeDesignprinciples
ShapeShift,260
Shapiro,Melanie,287
Shareholders,11,78–79,100,107,125–28
Sharingeconomy,17–18,134–35,187
Sidechains,60
Silbert,Barry,86,284
SilkRoad,9,276
Simplifiedpaymentverification(SPV),50
Simpson,Arianna,287
Skogstad,Anselm,240
Skynet,273
Slack,89
Smartcontracts,101–3,109,126,142,219
aidgroupsand,190
DApps,120,121
definitionof,101–2
MFIsand,192
multisigauthentication,103–5
ownershiprightsand,46–48
forpoliticalreputations,210–11
Smartdevices,150–54
economicpayoffs,161–64
futuredevelopments,164–67
hackingyourfuture,168–69
twelvedisruptions,156–61
Smarthomes,161,275
Smartlocks,117
Smartpills,151,158
Smartwallet,83,131,153
SnowCrash(Stephenson),38,315n
Snowden,Edward,243
Socialcontracts,99
Socialenergy,148–50
Socialproduction,129–32
SocialSecurity,80,176
Societalchange,257–58
SocietyforWorldwideInterbankFinancialTelecommunication(SWIFT),42,59,262
SocietyofEuropeanStageAuthorsandComposers(SESAC),229
Song,Dawn,288
SonyMusicEntertainment,229,230
SoulofaNewMachine,The(Kidder),150
Spain,AgoraVoting,218–19
Spam,34,39,255,321n
Spotify,88,229,230,239,319n
Srinivasan,Balaji,178–79
Stakeholders,262
Standardsnetworks,304–6
Stark,Elizabeth,288

Steiner,Peter,3
Stellar,32,37,170–71
StellarDevelopmentFoundation,170–71
Stephenson,Neal,315
Stiglitz,Joseph,35–36,57,107
Storingvalue,infinancialservices,61–62,64
Storj,95,120
Streamingmusic,229,230
Streamingopenandtrusteddata,208–9
Streamium,233
Studentdebt,248–49
SUber,165–67
Subledger,73–74
Surveillance,25,42,44–45,212,243–44,274–75
Swan,Melanie,110,204,224,247–49
Sybilattacks,36,37,315n
Systemicrisk,59
Szabo,Nick,4–5,37,101–2,255
TalkingHeads,227,228
“Taps,”146–47
Tapscott,Bob,261,268
Taylor,Simon,75
TCP/IP(TransmissionControlProtocol/InternetProtocol),43,50
Technology
democracyand,212–14
asimplementationchallenge,254–58
Termen,LevSergeyevich,253–54,277
Termsofthird-partyengagement,234
Tezos,95
Theoryofthefirm,92–93,100,105–6,121,319nTheremin,253–54
Thiel,Peter,93–94
360-degreedeals,229
Ticoll,David,25,109,134
Tinsley,Michelle,155
Titleregistration,8,19–20,51,188–89,193–95,198
Todd,Peter,133,268
Toolsofabundance,178–79
Top-downmanagement,89,92,106
Tor,263
Torvalds,Linus,88,282
Totalitarianism,34,52,141,145
TradeNet,165
Tradingvolume,256
Transactionalcapacity,255
Transactioncosts,92–93,95–101,107,142,193,269
Transparency,10,11,298
aidgroupsand,190–91
designprinciplesand,30,39,41,44,45

financialservicesand,66–67,77
governmentandpoliticalinstitutions,205,210,296
MFIsand,192
musicand,232–33,236
Transportation,137,156–57,164–67,206
Treat,David,70
Triple-entryaccounting,77,78–79,180
Trump,Donald,210
Trust
achievinginthedigitalage,10–11
costsof(re-)building,107–9,143
networkedintegrity,30–33
inpoliticalinstitutions,201–2
TrustBarometer,10
Trusteddata,208–9
Trustedsystems.SeeWalledgardens
Trustprotocol,4–6,58,309–11
Turingcompleteness,278
22Hertz,237–38
Twister,246
Twowaypeg,60
Uber,17,118,134,135,164–65,270
Ulbricht,RossWilliam,9
Unbankedandunderbanked,170–72,175–78
Unemployment,173
UNESCO,249
UNICEF,189–90
Unicoin,190
Uniquenodelist,32
UniversalMusic,229,230
Usagedataanalytics,233–34
Utilitygrids,145–50
Valueasincentive,35–39,202
Valueinnovation,60
Valuetemplates,232
Vavilov,Valery,261,268
“Vectorsofdisruption,”163
Vegetabile,Andrew,267
Venturecapitalists(VCs),284,287
Ver,Roger,263,284
VeriCoin,266
VerifyID,116
Verisart,133
Verticalsearch,97
VirtruCorporation,40
Virtualprivatenetworks(VPNs),118
Visa,187–88

Vogogo,72
Voorhees,Erik,56,81–82,260,284
VoterIDfraud,217
Voterintimidation,216–17
Voterturnout,200–201
Voting,198,202,214–15,218–19
electronic(e-voting),198,215–17
Waldemeyer,Moritz,228
Wales,Jimmy,282
Walledgardens,13,70,265
WarnerMusicGroup,229
WassenaarArrangement,243–44
Wastemanagement,inIoTs,157
Watchdognetworks,303–4
Watermanagement,inIoTs,157
WealthofNetworks,The(Benkler),277
Wealthtax,173
WeatherDApp,124–25
Weathernet,123–24
WeatherNodes,123–25,147,158
WesternUnion,20,56,115,185–86,187–88
WhatsApp,184
White,Derek,68–69
Wikinomics,128,137
Wikipedia,12,129,130–32,282
Wilkins,Carolyn,9,294,295–96
Williamson,Oliver,93–94,100,105–6,320n
Windowingstrategy,235–36
Winklevoss,Tyler,175,255–56,301
Winter,Alex,21
Wisdomofthecrowds,84–85,221
WISeKey,11,14,154,204
Womenleadersinblockchain,287–89
Wong,Pindar,300,305
Wood,Gavin,119
WorldBank,193,295,300
WorldEconomicForum(WEF),175,270,306
WorldHealthOrganization,281
WorldTradeOrganization,281
WorldWideLedger,6–8,75–77,95–96,142
WorldWideWebConsortium,271,299
Wozniak,Steve,129,274
Wright,Aaron,103,258,264,265,293
YouTube,230,234,235,236
Zeall,Anson,217
Zelaya,Manuel,193

ZerotoOne(Thiel),94

Zimbabwe,voterintimidation,216–17

Zipcar,134,137,187

Zyskind,Guy,27–28

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